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The FX Trader: If JPY can’t rally strongly now, when can it?
John J. Hardy
Global Head of Macro Strategy
Summary: Nearly all cylinders are firing in favour of a further JPY rally, so it’s time for the currency to respond with more strength or we’ll have to come up with a new model for how things are supposed to work in the currency market. Elsewhere, the USD inches stronger outside of USDJPY and AUD could be vulnerable after its recent outside.
What to know
Conditions about as supportive as possible for further JPY boost. Conditions are ideal for a follow through rally in the Japanese yen here. Friday’s soft headline US CPI data helped crush US treasury yields lower still, shrinking their yield advantage to Japanese government bond yields to a new cycle low since early 2022 Friday. Perhaps even more important, JGB’s have also rallied sharply recently at the longest end of the yield curve, but last night also rallied strongly from the front end of the yield curve and out to 10-year maturities after a strong 5-year JGB auction Tuesday that underlined the newfound stability in the JGB market. The benchmark 10-year JGB yield, for example, fell a chunky eight basis points Tuesday. Fundamental concerns about the JGB market amidst anticipation of a fresh fiscal expansion from the Takaichi government have been the primary pillar of the yen bear case and the recent market action has largely removed this pillar. Other factors favouring a weaker JPY including a wobbly US equity market (mostly cross-currents so far, but the most popular trade of recent years, the Mag7, have been under performing for months) and the strong rally in US treasuries as noted above.At the same time, outside of USDJPY, the big dollar has had a hard time falling. According to Bank of America’s FX and rates sentiment survey, the market is the most bearish the US dollar it has been since 2012, which of course was just after the start of a multi-year rally from the 2011 lows in the greenback. That’s not to say we are headed for a repeat. But it certainly is to say that if we look away from USDJPY, the lack of follow on USD weakness given extreme consensus that the currency is headed for trouble should be a red flag for USD bears. Nothing has developed on the charts just yet, but if EURUSD takes out that sub-1.1800 support and GBPUSD takes out the 1.3500 area, the USD bears could be in for a squeeze.
Summing up the above... In recent months, the level of USDJPY has bothered me far less than the soaring EURJPY and GBPJPY levels, with the former reaching all time highs above 185.00 while GBPJPY has reached levels I would have thought impossible a year ago, far above 200.00. Could we be set up for both a stronger US dollar and even stronger Japanese yen regime in coming weeks? Let’s consider the Japanese financial year calendar as well, with the end of the year approaching at the end of March and exporters perhaps soon feeling some new urgency to hedge FX exposure for the coming year.
Chart focus: GBPJPY Ichimoku
As noted above, GBPJPY is one of the JPY pairs that has backed up far more than I would have thought possible previously, with much of the JPY weakness linked to concerns that Japan is facing some kind of slow-burn Truss moment with the stability of the JGB market. Now, JGB’s have found strong support. As for sterling, let’s not forget the UK’s feeble government, troubled economy in the new geopolitical reality and its twin deficits. Those factors escape attention when ex-US global equity markets have rallied in almost a straight line recently, with the UK market one of the star performers, but if risk sentiment faces a stumble together with all of the JPY positive factors we have outlined above, GBPJPY could hit an air pocket. For Ichimoku chartists, the key focus here is on the lagging Chikou line (dark green “lagging span”) slicing though the price bars (a done deal) and then on the price action eventually penetrating and closing below the daily cloud (Not yet accomplished: note how the cloud itself was support back in the summer and fall of last year – still need some price action and/or time to take out the cloud from here). Then the focus will shift to the weekly chart not shown here, where the cloud is still below 200 and will be for many weeks to come.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The JPY momentum shift is there, but the moving averages have yet to line up for a real JPY uptrend signal – stay tuned there. Likewise, the US dollar has failed to continue weakening, but is very far from showing broad strength, though some key charts are pivotal as we note above. Sterling and euro weakness have been fairly consistent of late. AUD still has the strongest positive trending signal, but could roll over here for some consolidation with pressure on precious metals here and as Australia’s yields dropped on the RBA minutes overnight (nothing new).
Table: NEW FX Board Trend Scoreboard for individual pairs. EURJPY and GBPJPY have joined USDJPY in bearish mode on our trend measure, let’s see if we are set for an extension here. Elsewhere, note that EURCNH has also slipped into bear mode as the CNH strength has grinded on. Also, the new EURGBP bull trend needs a follow on move higher through 0.8745 to show real signs of trending. The USD pair closest to registering a new strong USD trend on our board is GBPUSD – watching that one in days ahead around the 1.3500 level as noted above.
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