Comment: Is selling the seven-year high USDJPY a low-risk contrarian bet?
Dollar bears are thin on the ground these days, writes Brenda Kelly, head analyst at London Capital Group, and with the USDJPY struggling with technical resistance I wonder if selling this seven-year high could provide a low risk-reward contrarian trade.
USD/JPY
¥152.9745
11:26 04/05/24
The confidence -- potentially misplaced -- that growth will pick up in the latter part of the year has fuelled the momentum in the greenback and today we are seeing it push to highs against the Japanese yen not seen since July 2007.
This move is dollar-driven and little down to any recent intervention from the Bank of Japan and the current momentum in the pair makes it both difficult to jump on board or take a contrarian view.
But there is certainly some opportunity to be found here.
Japanese data dump
Thursday sees the release of Japanese retail sales. In March this figure declined at its fastest pace in 17 years, sliding 9.7% from the same month in 2014. A drop was expected in light of the sales tax hike in April 2014 but it was still marginally worse than what was expected.
The macro calendar heats up on Friday in respect of relevant currency drivers with the preliminary release of second-quarter US GDP in the afternoon.
Prior to this, overnight, we’ll get to see how Japanese national consumer price inflation (CPI) and household spending has fared, along with Japanese industrial production and the unemployment rate.
Mixed signals from Tokyo
We have witnessed signs of continued weakness in Japanese private consumption, which accounts for some 60% of GDP.
This remains a key issue for the BoJ as the economic recovery remains fragile following a recession last year and, while many would expect the central bank to embark on even more aggressive tactics to spur growth, there is a chance that rising wages and increased purchasing power from lower oil prices will boost household spending.
The consensus expectation is for April’s household consumption to rise 3.1% annualised which is certainly a lot better than the 10.6% decline seen in March.
Japan’s core CPI ticked higher in March; rising 2.2% on the year and beating expectations. In the country's capital, Tokyo's core CPI for April rose 0.4% from a year earlier, slightly below the 0.5% forecast.
The world's third-largest economy also expanded at an annualized rate of 2.4% in the first three months of this year, beating a median market forecast for a 1.5% increase and a revised 1.1 % expansion in October-December.
One could say that ‘Abenomics’ is starting to bear fruit -- but the signals are mixed and policymakers may feel that additional stimulus is required to break the deflationary mind-set.
The weak yen has helped to bolster revenues and seen marginal increases in employment and wages.
...and even more mixed from the Fed
When we talk about mixed signals, the first quarter and indeed this current quarter in the US seems to be a little uncertain too.
Yet dollar bulls paw the ground and look with confidence to a better first half.
Markets are now pricing in a 55% probability that the US Federal Reserve will hike rates in December.
With a now expected negative GDP growth figure for the first quarter of 2015 of between -0.7% and -1.0%. second quarter growth will become ever more important.
Bear in mind, two quarters of negative growth would mean that the US is in a recession.
This is not necessarily a great backdrop to be talking about hiking rates.
For now, the USDJPY is struggling with option barriers and technical resistance around 124.00/50 and chasing the current move is generally unwise.
Being a contrarian can offer benefits and while selling this seven-year high is counter trend, it could well provide a low risk reward trade.