G10 FX weekly – USD/JPY breaks through resistance

by: Roy Teo , Georgette Boele

  • USD/JPY breaks through technical resistance
  • Since the last two weeks, US dollar has strengthened on better US data
  • Greece negotiations affect the euro

US employment report key for US dollar rally

The US dollar (USD) has strengthened by more than 2% against its trade weighted basket of currencies since the past two weeks. Better-than-expected US data have resulted in some upward adjustment in interest rate expectations for 2015 and 2016. This has supported the US dollar. However, financial markets are still under-estimating the pace of rate hikes in the US this year and next, in our view. Therefore, we expect the US dollar to rally by another 10-15% this year. In the coming week, the US employment report will be released. If non-farm payrolls as we expect and hourly earnings surprise on the upside, the rally in the US dollar could gain significant momentum.

Technical break in USD/JPY

The US dollar rallied strongly against the Japanese yen (JPY). The pair broke through the technical resistance of 122, which is  significant in our view. Rumoured stop losses that were layered above 122, accelerated the move. As a result, USD/JPY rallied to a high of 124.41, a level not seen since 2007. This is good news for the US dollar, because a strong rally in USD/JPY has the potential to lead a broader US dollar rally. We expect USD/JPY rally to continue and to reach 128 at the end of this year.

Greece negotiations affect the euro

Uncertainty surrounding Greece debt negotiations with creditors have resulted in an increased demand to hedge short-term volatility in the euro. We remain cautiously optimistic that a last minute deal will be agreed ahead of Greece’s next EUR 300 million debt payment on 5 June. As speculators’ net short positions in the EUR remain high, a relief rally could push the EUR/USD temporary back above 1.10. However, the ECB will continue to convey the message that QE is here to stay. This could take some wind out of a possible move above 1.10 in EUR/USD. What is more, we expect a strong US employment report on Friday to more than outweigh any euro supportive news. So EUR/USD is set to decline.

Weaker commodity currencies

In the past week, lower crude oil prices weighed on both the Norwegian Krona and Canadian dollar (CAD). As expected, the Bank of Canada left monetary policy unchanged on 27 May. We expect the CAD to decline towards 1.30 against the USD later this year as interest rate differentials between the US and Canada widens in favour of the US dollar. The Australian dollar (AUD) was sold off after business investment plans were weaker than expected, led by sharp declines in the mining industry. This has led to expectations that further monetary stimulus and a lower exchange rate are needed to rebalance the economy. We expect the Reserve Bank of Australia to keep the Official Cash Rate unchanged at 2% on 2 June, but shift from a neutral to easing bias. Later this year we expect a 25bp rate cut. We remain negative on the AUD and expect AUD/USD to decline to 0.72 by the end of 2015.