NEWS / Foreign Exchange

Yen Clears Significant Price Levels on Demand for Yield

Talking Points

• Japanese Yen: Breaks 118.50 as Nikkei adds 215 Points and Investors Demand Yield
• Australian Dollar: Tumbles on Profit Taking Ahead of RBA Decision
• Euro:  Wholesale Price Inflation Revised Higher, Yields Drive Demand
• US Dollar:  Pending Home Sales Highlights Short Term Event Risk

The Yen moved sharply lower through late Asia and early European trade, as a strong rally on the Tokyo Stock Exchange drove investors to higher-yielding currencies. The Australian and New Zealand dollars saw modest retracements, however, with traders booking profits ahead of the upcoming RBA interest rate decision. Asia-Pac currencies notwithstanding, popular carry trade currency pairs challenged significant technical levels as the USDJPY breached 118.50 while the EURJPY inched above 158.50.

Overnight data was limited to the Australian Trade Balance report, with a mildly bullish surprise providing a perfect opportunity to liquidate AUDUSD longs. Indeed, the post-report peak marked the daily high at 0.8167 as a wave of selling challenged congestion levels near 0.8120. The pair??™s inability to break lower partly reflects the fact that expectations have begun leaning in favor of an RBA interest rate hike. Some banks report that odds now stand at a 60% chance of a 25bp change through tonight??™s announcement??”a direct contrast to previous reports showing overwhelming support for no action.

European data was similarly limited, with uneventful Swiss CPI and Euro Zone PPI reports initiating minor moves in affected currencies. The Swiss Federal Statistics Office reported that consumer prices gained 0.1 percent through the month of March??”exactly in line with consensus forecasts. Markets initially sent the Swissie lower in the wake of the release, but yield differentials were blamed for broader CHF declines as traders remain indifferent to domestic inflation numbers. The Swiss National Bank has made it clear that it expects inflation to remain muted through the first half of the year, leaving little reason to make a fuss over soft March CPI gains. 

Reactions to a February Eurozone PPI report were similarly muted; a small surprise was not enough to elicit stronger EUR gains. Rebounding energy prices led wholesale prices to a 2.9 percent year-over-year gain, but an upward revision to January figures meant that price pressures actually eased through the more recent sampling period. Strong US Dollar demand led the EURUSD lower in the moments following the report, but continued EURJPY bids forced another run at intraday peaks of 158.50.

Notable US event risk consists of Pending Home Sales at 14:00 GMT. Given the discrepancies between recent New Home Sales and Existing Home Sales figures, markets will pay very close attention to any significant surprises in the more forward-looking Pending sales report. Otherwise, currency markets will likely remain muted ahead of tonight??™s Reserve Bank of Australia interest rate decision.