Is this a US dollar break-down or a head-fake?

Friday wrap: Weak US Retail Sales sees fresh USD weakness.
A huge pump and reverse in US long yields last week was disorienting for JPY traders, and USDJPY traders in particular, as the hot US January core CPI reading Wednesday threw USDJPY bears for a loop, pumping USDJPY all the way to 154.80 after it had traded below 152.00 earlier in the week as US 10-year yields bolted above 4.60%. But Thursday saw both moves reversing and Friday’s weak US January retail sales further cemented the reversal in the yield spike and took USDJPY as low as 151.48 overnight. The action elsewhere was less volatile as the USD traded lower all week versus European FX and, for example, versus the Aussie – ending the week on a low note.

The week ahead: RBA, RBNZ, UK and Japan CPI
We have an RBA meeting tonight that is widely expected to see the RBA reducing the policy rate for the first time for the cycle. The RBA and Norges Bank are the last two non-BoJ central banks to hold out with unchanged policy rates. The forward expectations are for a shallow and slow cutting trajectory, with a further cut to come in perhaps May and another by year-end. The RBA will likely feel emboldened to cut by the drop in inflation together with the trade-weighted Australian dollar no longer on the precipice of multi-year lows.

The RBNZ is in a far different place, having hiked more than Australia and now cutting more rapidly, expected to deliver another 50 basis points of easing Wednesday to take the Official Cash Rate to 3.75% as New Zealand’s rising unemployment rate and low inflation levels leave further room for easing.

Inflation can still create one-day wonders on the charts and on that note we have the UK January CPI up on Wednesday and Japan’s January CPI numbers up Friday.

Elsewhere this week – the US calendar is quiet this week and I have never had less interested in the FOMC minutes than this week with all eyes on Trump administration policy and the long-term risk that the Fed is on the path of losing its independence and becoming subsumed into what Rabobank’s Michael Every calls the US’ Grand Macro Strategy.

The weak USD – is this the beginning of a breakdown?
It is too early to call an across-the-board US dollar breakdown here, even if the greenback has broken lower in places, most clearly in AUDUSD and in GBPUSD locally, but not in EURUSD. And the prior USD strengthening move was so large that considerable heavy lifting is still needed to establish a proper USD bear trend. For now, I am most at ease in expressing a negative US dollar view in USDJPY now that we have a smart reversal in place after last week’s action and we have the fundamental support of rising Japanese yields together with US yields pushing back lower. See the USDJPY chart below or a discussion.

Elsewhere – as I outlined in my previous update, I am constructive on the longer-term potential for the euro on the prospects for a massive fiscal expansion to fund the construction of a credible defense force whatever shape the post-Ukraine War situation takes, although especially if that is combined with lower energy prices. But there are near-term hurdles and uncertainties that could weigh on the euro through the April 1 report on US trade relationships and risk of tariffs to offset EU VAT, etc., as well as geopolitical headline concerns and uncertainties on the timeline and the particulars of the Ukraine War wind-down. Technically, EURUSD has so much hard work to do, starting with a break above 1.0500-1.0600 zone, which even then wouldn’t yet signal a full trend reversal in the bigger picture.

Chart: USDJPY
The USDJPY rally and reversal mimicked the path of long US treasury yields last week, as the US 10-year benchmark sliced sharply back above 4.50% and nearly to 4.66% before retreating equally quickly to close the week back south of the critical 4.50% level. Meanwhile, Japanese yields continue to crank to new cycle highs, slowing wearing down the yield spread of the carry trade – a trend that is likely to continue as it feels that this Trump administration has an entirely different approach to fiscal deficits than its first iteration. From here, watching the local lows in the low 151.10. Theoretically, we would need new local lows in long US yields to get there, but USDJPY traded just below 150 the last time the US-Japan 10-year yield spread was at current levels, so the bigger focus may be on the 148.65 area, which could open up for a focus on 140.00 if US 10-year yields ease back down to 4.25% (for example on softer US economic data and a snowballing reassessment of the US fiscal trajectory).