The yen deepens losses to fresh four-and-a-half-year lows and 25-year lows against the dollar and sterling after the Bank of Japan (BoJ) voted unanimously to keep rates unchanged at 0.50%. While the outcome was widely expected, the total absence of a single vote to raise rates among the nine-member policy board was a surprise, prompting traders to dump the low-yielding yen at a time when falling risk appetite is already highlighting the currency’s role for fresh carry trades. The yen sustained fresh damage after BoJ governor Fukui said a weaker yen is not an immediate risk and that chances for a July rate hike are "not necessarily high.”
This morning’s busy U.S. data schedule will be dominated by the 8:30 am release of the May CPI expected up 0.6% from 0.4%, with core CPI remaining unchanged at 0.2%. This would translate into an annual core CPI of 2.3%, suggesting the upside risks of core inflation are stabilizing. Annual core CPI slowed to 2.7%, 2.5% and 2.3% in February, March and April respectively, supporting the case for overall cooling in inflationary pressures.
The dollar may well lose its firming momentum in the event of an annual core CPI below 2.3%, while another figure of 2.3% could be neutral to positive for the greenback depending on the rounding of the figure (that is whether 2.3% is rounded off from as low as 2.27% or as high as 2.34%). Any figure above 2.3% is likely to be dollar positive. But traders should also watch the NY Fed “Empire State” manufacturing survey, also due at 8:30 am, expected to rebound to 11.3 in June from May’s 8.0 and April’s 3.0. The new orders and employment component also rose considerably in May.
The first quarter current account deficit (also due at 8.30 am) will provide FX traders with passing interest as it is expected to have edged up to $201 billion after sharply falling to $195.8 billion in Q4 from $229 billion in Q3.
The April TICS report on capital flows is due at 9.00 am is expected to show a rebound to $60 billion from $45 billion, with net long-term securities seen slowing to $55 billion from $67.6 billion.
The 9.15 am release of industrial production is expected at 0.2% in May from April’s 0.7%, while capacity utilization is seen unchanged at 81.6.
Finally, the 10 am release of the University of Michigan sentiment survey is expected to show a slowdown to 87.8 in the preliminary June release from 88.3. We expect a lower figure at 83.0.
Yen selling extends on damaged by BoJ voting, assessment
The combination of a unanimous BoJ decision and Fukui’s lack of concern for yen weakness has pushed USD/JPY to just below our projected resistance target of 123.50, another 4 ½ year high. Any figure core CPI figure at 2.3% or above could extend gains towards 123.75. A figure of 2.3% would be dollar positive while anything less might trigger short-lived USD losses until U.S. stocks open higher on receding inflation worries. A weaker than expected industrial production report and high inflation, however, could cap the pair, with support at 123.20 and 122.90.
Sterling is vulnerable to 1.9650 support
Cable stabilizes just under 1.97, but the risk of renewed selling towards 1.9650s remains highlighted by upside inflation in the United States. Expectations of one more BoE rate hike are the source of support, but the ongoing strength in U.S. bond yields could prevail especially if the renewed equity market losses trigger unwinding in the high yield sterling as was seen earlier in the week. In the medium term, the combination of prolonged weakness in the UK, receding inflationary pressures and U.S. data strength can send cable to as low as 1.9610 and 1.9530.
Near-term support stands at 1.9670, followed by 1.9650, which is the 50% retracement of the 1.9180-2.0131 decline. Subsequent support stands at the 5-month trend line of 1.9625-30. Upside capped at 1.9730, followed by 1.9755.
Euro requires weak U.S. CPI
Although the daily EUR/USD chart shows signs of stability, the weekly chart remains mostly bearish from and oscillator perspective. The currency entering its seventh consecutive weekly decline as euro longs further reduce their positioning in the midst of no near term ECB rate hikes. Any resurfacing of fears in U.S. inflation will generate fresh gains in U.S. yields and drag the pair towards 1.3280 and the 1.3265 (50% retracement of the 1.2863-1.3681 rise). Key support stands at 1.3220. Upside capped at 1.3330, while weak inflation and industrial production are seen propelling the pair towards 1.3345-50. Kay resistance stands at 1.3370.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
140 Broadway, 30th Floor
New York, NY 10005 (212) 644-4220
a.laidi@cmcmarkets.com
