Will USD/JPY Fake Investors Out Again in 2015?

• Will USD/JPY Fake Investors Out Again in 2015?
• USD/CAD Soars on Lower Oil Prices
• AUD: Copper Prices Drop to 5 Year Lows
• NZD: Chinese Trade Numbers on Tap
• GBP: Beware of the Drop in CPI
• EUR: Shrugs Off QE Talk

Will USD/JPY Fake Investors Out Again in 2015?

Watching the markets in the first 2 weeks of January is giving us a sense of déjà vu.  At the end of 2013, investors became very excited about buying USD/JPY and selling Treasuries. At the time, everyone from economists to institutional investors and hedge funds firmly believed that these would be the two best trades of 2014 and their buying drove USD/JPY to 5-year highs. As we now know, these 2 trades turned into painful bets that failed to pay off until the last 3 months of the year.  Unfortunately the data from the CFTC showed that most speculators did not hold on for that long as their patience and trading accounts wore thin. 

Buying USD/JPY is once again one of the market's favorite global macro trades for 2015 with some optimistic analysts calling for a move to 145 but as the currency pair consolidates and heads for a break of 118, many traders are wondering if USD/JPY will fake everyone out again.  With Treasury yields and stocks falling, the currency pair received no support from risk appetite or bond yields and on Friday, the drop in wages raised doubts about the Fed's plans for rate hike. While we believe that USD/JPY will eventually make a run back to its 121.85 December high, we see a deeper near term pullback towards the 116.75 to 117.50 range.  The decline in wages and drop in oil prices poses a downside risk to this week's U.S. economic reports.  There is no question that lower gas prices will cause retail sales to fall but if spending ex autos and gas fails to rise as much as expected, investors will be quick to put the blame on lower wages.  At the same time, lower CPI may make the doves coo louder. 

In the long run however, it will be very difficult for the Fed to justify holding interest rates at current levels with the unemployment rate at 5.6%.  As the year progresses the unemployment rate will fall further putting greater pressure on the Fed to normalize monetary policy. Therefore we feel that the slack in the labor market will only delay and not stop the Fed from tightening. Instead of raising interest rates in the middle of this year they will raise rates in the fourth quarter. This leaves FX traders with 2 options - sell USD/JPY now for a move to 117 or wait for the dip towards 116.50 to buy again.

CAD Crashes on Oil, Chinese Trade Next

The biggest story in the financial markets today was the drop in oil prices. WTI crude fell another 4.8% to its lowest level since 2009. At this rate it seems only a matter time before oil prices slip to $40 a barrel.  Unsurprisingly the Canadian dollar has been hit hard by this move, dropping to its weakest level against the dollar since April 2009. It won't be long before USD/CAD tests our target of 1.20 with further gains likely. Competition in market share is intensifying with Saudi Arabia offering discounts over U.S. and European oil.  The U.S. on the other hand is taking steps to ease the ban on exporting domestic crude (condensate).  One of the main reasons why investors ignored the sharp rise in full time jobs in Canada on Friday is because they know that oil producing nations have a lot to lose with prices at current levels. Since economic data is released with a lag, we are in the early stages of seeing how much damage the decline in oil prices has on the Canadian economy.  Although some market participants believe that stronger U.S. growth will lift the Canadian economy, the pain of lower oil prices should precede that with Canadian data weakening before it improves. Meanwhile the Australian and New Zealand dollars also declined on the back of lower commodity prices - in addition to the move in oil, copper prices fell to 5 year lows.  Chinese trade numbers are scheduled for release this evening and in order for either currency to avoid further losses, we need to see a sharp rise in exports. 

GBP: Beware of the Drop in CPI

The British pound has held up extraordinarily well considering the recent disappointments in UK data. Earlier this month we learned that manufacturing, service, and construction sector activity slowed in the month of December, a sign that the economy is losing momentum.  So what could traders we waiting for? More evidence that the Bank of England could forgo a rate hike this year.  Consumer and producer prices are scheduled for release on Tuesday and chances are the data will surprise to the downside. While the British Retail Consortium reported that prices fell at a slower pace last month, the cautious recovery should have deterred retailers from raising prices towards the end of the year.  For the first time in 12 years, the annualized pace of CPI growth is expected to fall below 1%, the point at which the BoE Governor must write a letter to the Chancellor explaining how and why they missed their target and what they plan to do about it.Back in December, Carney said the dip in inflation will be temporary but since then oil prices have dropped by another $15. So even if he makes the same argument that inflation will accelerate, prices are moving further away from their 2% target and as such, their expectations for inflation must be adjusted because getting back to $80 a barrel was much easier in December than now. If CPI surprises to the downside, GBP/USD should resume its slide.

EUR: Shrugs Off QE Talk

After rising for the first time in 11 trading days, the euro started the week unchanged against the US dollar.  No Eurozone economic reports were released today and the only piece of data on the calendar for Tuesday is German wholesale prices. For the most part the euro remains under pressure and we do not anticipate a significant rally this week.  At the same time, the prospect of weaker U.S. data could also limit the downside in the pair.   The recent weakness in German data should make the country more amenable to Quantitative Easing.  This week's inflation data from Germany will confirm that prices have not risen.  ECB officials continue to signal that QE is coming. According to ECB member Makuch, the QE program is being shaped and they will embark on it if needed. Noyer Said that the Greek elections are no obstacle for a QE decision in January and any plans needs to be limited based on outstanding debt.  ECB member Nowotny called on the central bank to take deflation risks seriously and to not wait too long for a reaction.  He confirmed that the ECB is discussing a range of options for QE.  This week's Eurozone calendar contains primarily secondary reports such as Eurozone trade, industrial production and CPI numbers.