FX Update: Is the sixth time the charm for 105.00 USDJPY break?

Trading focus:

Post-FOMC, sorting through JPY strength and whether USD is also strong or merely choppy

The huge 105.00 level in USDJPY – challenged on five prior occasions without really falling for more than a session or two since early 2018, has fallen once again this morning as the USD reaction to FOMC has waxed hot then cold.

The JPY resurgence in evidence yesterday already before the FOMC meeting accelerated as USDJPY took a look below 105, although the move yesterday and overnight was more impressive in other JPY crosses, including the classic risk barometer AUDJPY and EURJPY, where we saw a break below the big 124.50 area. This morning, the move has petered out a bit in a broad sense as the US dollar chops all over the place, confusing the initial USD rally that unfolded late yesterday and overnight as risk sentiment headed south. There was nothing in the FOMC to specifically trigger a market temper tantrum as the sell-off may be a recognition that the Fed’s new policy shift is largely irrelevant here. More concerning is the slowing US Retail Sales data in August on top of a downward revision for July and the ongoing lack of new stimulus, although it looks like Trump is ready to cut a deal with the opposition to get the money flowing into the hands of voters before the election.

As for the FOMC meeting itself, there was nothing on the table that was not already flagged with the Fed’s new “flexible” average inflation targeting regime. It is nominally dovish, but is really only interesting down the road in the event if inflation picks up and the Fed’s resolve and reactivity to data is only tested once inflation starts to shoot north of the 2.0% level for the PCE core, something that only happened in briefly clusters of a few months in early 2012 and for several months in 2018, both times clearly a lagged result of a surge in oil prices and a related decline in the greenback’s fortunes. Inevitably, the Fed will trip over this forward guidance whether a) because inflation fails to materialize and isn’t really within their ability to create in the first place as that power only resides with bank credit creation and fiscal stimulus or b) inflation starts to rise uncomfortably above 2.0% even as employment fails to improve to pre-COVID-19 level. Basically, the AIT regime is the medicine for the past cycle – when in retrospect the Fed feels it could have hiked at a far slower trajectory without creating uncomfortably high inflation. The future cycle may not look so similar. What is the Fed policy rate in a world of 3% inflation, 0% real GDP growth and perhaps a 6% unemployment rate?

Chart: USDJPY weekly
USDJPY has slipped below 105.00 now for the sixth time since early 2018. The pair has only closed below that level on a daily basis a very few times in prior episodes – even including during the COVID-19 panic back in March when intraday price action saw the pair trading nearly to 101 before rebounding sharply. The ability for the JPY to linger at these higher levels could point to a move to the next major support area into 100.00. The Bank of Japan met last night with few headlines and no change of policy as Governor Kuroda pledged to work with new Japanese Prime Minister Suga.