USD/JPY: Good US news can be bad news for the pair

The good data from the US support higher interest rates and a stronger dollar.
Yet the prospects of higher interest rates sends stock markets plunging and the safe haven yen finds itself in demand

Yohay Elam FXStreet

The US economy is looking good. The economy continued growing at a healthy rate in Q4 2017 and was held back only by a drop of inventories. The first jobs report for 2018 showed a beefy rise in jobs, 200K. More importantly, average hourly earnings reached 2.9% in a path that seems more sustainable. And the latest ISM Non-Manufacturing PMI is also supportive.

The services sector is growing at a rapid clip: the score of 59.9 may have missed the round level of 60 but clearly beat expectations for a level of 56.5. In addition, the new orders component jumped to 62.7 points, the highest since 2011. The employment component leaped to 61.6 points, the best figure since at least 1997, when recrods began. And perhaps the icing on the cake came from the prices paid component: a rise to almost 62 points from 59.9 beforehand. Inflation has been the missing component and the forward-looking figure for the largest sector shows it is on the move.

A stronger US economy implies a steeper path of interest rate rises and thus a stronger dollar. The greenback is enjoying gains against most currencies. However, the reaction in stock market is different this time.

Good news for the US economy was bad news for stocks. Investing in stocks which are riskier becomes less attractive when safe interest rate options provide a higher yield. The stock market crash on Friday extended into global equities on Monday.

And when there is trouble in stocks, the Japanese yen is the utlimate safe haven asset. With long periods of calm in all markets and rises in all markets, some may have forgotten what "risk off" looks like: money flows back from assets deemed as risky to those seen as safe, and from high yielding opportunities to low yielding one.

Is it already happening?

Not exactly. The Japanese yen is gaining ground against a broad range of currencies, but it isn't excelleing against the greenback. The USD/JPY is balanced around 110.15 in the middle of the US Monday morning, especially as stocks stabilize.

However, if stocks resume their falls, the yen could emerge as teh big winner.

More: USDJPY: Initial support pegged near JPY109.70 - BBH

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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