Strong US data helped firm the USD further yesterday. The initial estimate of US GDP came in far stronger than expected and a very strong Chicago PMI reading mitigated the risk of pronounced weakness in the ISM Manufacturing release today. The most important signal for currencies came from the US Treasury market, where yields surged all along the curve on the strong US data.
It looks like higher yields and a higher US dollar are the pain trade here as the market may have overindulged on its view of how profoundly the Federal Reserve has turned on policy. Note our discussion on inflation expectations in today’s Morning Call
as a key factor in why the Fed so aggressively applied the brakes, but also why it isn’t about to bring profound easing as inflation expectations have bounced back rather aggressively with everything else. Trading interest
• Constructive on USD longs versus JPY and AUD – even EURUSD short as long as we remain below the highs this week.
• Short AUD interest in crosses as well now, including EURAUD longs next week on a hold above 1.6000 and AUDCAD downside if we remain below 0.9400.
• For GBP longs, we suggest EURGBP needs to hold below the 0.8600-25 zone to remain constructive on downside Chart: USDJPY
USDJPY has ripped higher in the wake of strong US data and a surge in US yields, taking the pair up through the 200-day moving average. It is now eyeing the next resistance area up into 112.00-112.50. The rally looks like a real “pain trade” linked to the assumption that the Fed is ready to bring profound easing.