Has USD/JPY Bottomed?

It says a lot when consistently softer economic data can't bring down a currency. The U.S. dollar refuses to fall despite clear evidence of a slowdown in the recovery. We've seen consumer spending drop for the second month in a row, consumer price growth decline for the first time in more than a year, job growth slow to 98K in the month of March and manufacturing activity in the NY region almost grind to a halt in April. This deterioration drove the odds of a June rate hike down to 47% and the chance of tightening in September down to 67.5%. To put this into perspective, at the beginning of the month, the market saw an 80% chance of a rate hike in September. With this in mind, the U.S. dollar and U.S. rates should be trading lower but instead of breaking 108, USD/JPY held support and even broke above 109 intraday. It can be argued that the greenback is taking its cue from yields but on Tuesday, when 10 year rates hit 5 month lows, USD/JPY drifted only slightly lower. We can pound the table about how the dollar should be trading lower but its obviously not and that is a reflection of the bids below 108. On a technical basis, USD/JPY found support right at the 50-week simple moving average. Today, the greenback traded higher against all of the major currencies as yields recovered part of Tuesday's losses. No U.S. data was released but the Beige Book was mostly positive. According to the various Fed districts, the economy grew at a modest to moderate pace through end of March. Their comments on the labor market were mostly positive with the central bank noting that employers are having a harder time filling low skilled jobs, wage hikes broadened with employment growing modestly to moderately. 

Complacency is the only clear explanation for the dollar's resilience. USD/JPY has fallen sharply over the past month and investors are waiting for the next clear trade. While everyone knows that the Federal Reserve intends to raise interest rates again this year, there is no immediate reason for investors to readjust current expectations. The Philadelphia Fed manufacturing index is scheduled for release tomorrow and given the sharp drop in the Empire State survey, the risk is to downside for the report. 

After Tuesday's strong move, sterling failed to extend its gains on Wednesday. The sharp rise in U.K. Gilt yields should have taken the currency higher but instead GBP/USD sank below 1.28. Today's move was a combination of profit taking and dollar strength. Data wise, retail sales are the big focus for GBP this week. Spending is expected to contract in March after rising strongly in the month of February. Bank of England Governor Mark Carney speaks tomorrow and his views could go a long way in determining whether GBP/USD recovers or fails from current levels. Today's pullback is small compared to yesterday's sharp rise. The EUR/USD also pulled back today relatively healthy Eurozone data. The region's trade surplus rose to 19.2B from 15.7B in the month of February while consumer price growth accelerated to 0.8% from 0.4%. There are only 2 trading days left before Round 1 of the French elections and we continue to expect euro to pull back as traders unwind positions ahead of the big event. 

All 3 of the commodity currencies fell sharply today with the Australian and Canadian dollars leading the losses. AUD was weighed down by lower copper and gold prices while the sharp -3.6% drop in oil prices sent the loonie tumbling lower. This was the largest one day decline in the price of crude in 6 weeks and the move was motivated by a smaller than anticipated fall in inventories.Wednesday's oil inventory data wasn't great and the disappointment was responsible for the move in oil. USD/CAD looks poised to test 1.35 and could break this level if oil continues to fall. The New Zealand dollar also declined but comparatively less than its peers thanks to a stronger service sector PMI report. Consumer prices are scheduled for release this evening.