• USD/JPY: inflation rearing its ugly head puts Fed in a trap.
  • USD/JPY: bulls making way for the bears targetting a breakdown to 1.05.00.

USD/JPY has been extending the downside in the north America session today, faded hard from the highs in the session when the pair rallied on the back of a recovery in stocks but only to meet angry bears smacking the dollar back down to size and hammering a nail in the coffin at 106.20 where stops were triggered. USD/JPY is now making a fresh 1.3 year low. Currently, USD/JPY is trading at 106.10, down -0.79% on the day, having posted a daily high at 107.06 and low at 106.06.

The US dollar is has been testing the YTD lows and down -0.61% at the end of the day having traded between a range of 88.558 - 89.004. This has left the bulls cringing below the 61.8% of 2016 rally at 106.50 and bears lining up to test territory into the 105's.

The main driver for the weakness in the dollar has been an elephant in the room for a long time, but the markets are finally pricing in a harder landing for the US economy, with forecasters and models downgrading GDP forecasts while at the same time, inflation is rearing its ugly head and that is going to be very problematic for the Fed* that is intent on normalising policy by hiking interest rates and reducing the balance sheet. All the while the government plans on spending its way into achieving higher growth while Trump's objectives are likely only going to be achieved through a weaker dollar. 

*In respect to US 10yr treasury yields, these initially rose to the highest since Jan 2014 at 2.94% in European trade before sliding to 2.89% in NY. Fed fund futures yields point to a rate hike in March while it looks questionable if the Fed will hike a further two or three times this year. 

Another factor that is always going to be supportive of the case for the downside in the pair is with volatility. The VIX is currently up 2% to 19.6 but was over the 20 mark at one stage in the session, (there was a high of 50 on Feb 6 leading to the stock market rout). Stocks were volatile although there was a surge into the close in the benchmarks. Utilities have been leading gains while energy is down 1.2%.

Elsewhere, Japanese finance minister Taro Aso told parliament that the yen’s recent rise wasn’t worrying enough to warrant intervention and the markets are ok with that, obviously. So far, that has been little reaction in the markets to the news that Waseda University professor Masazumi Wakatabe will be joining the BoJ - (supports aggressive monetary easing).

US data confirms inflationary pressures are building

In respect to data, analysts at ANZ argued that the January core PPI confirmed inflation pressures are building in the US. February business surveys highlighted a spike in input costs. US industrial production growth moderated. "The US PPI ex-food and energy firmed to 0.4% m/m (market 0.2% m/m) reinforcing the message from yesterday’s stronger-than-expected CPI. The Philadelphia Fed index rose, with prices paid spiking and new orders more than doubling. Empire Manufacturing was a little weaker but prices paid rose to the strongest in six years and new orders and employees rose. On the other side of the coin, industrial production growth unexpectedly dipped in January," the analysts explained. While the CPI report and retail sales have been the highlight of the week, eyes will be on tomorrow's Jan housing starts and Feb consumer sentiment from the University of Michigan. 

Fundamental recap

USD/JPY levels

Valeria Bednarik, chief analyst at FXStreet explained that despite the fresh 15 month lows, the pair is bearish: "Particularly as it is unable to recover above the 107.00 level. In the  4 hours chart, the pair continues developing well below its 100 and 200 SMAs, while technical indicators bounced from oversold readings, but remain well below their mid-lines. The pair needs to clearly break this 106.80 region to be able to extend its gains up to the 107.55 area first, en route to 107.90".

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