NEWS / Foreign Exchange

USD/JPY breaks out

• US Treasuries slowly grinding lower
• Downtrend in European bonds continues
• USD/JPY breaks out
• Investors turning more positive again

On Monday, the EUR/USD pair was going nowhere, until the housing data gave the dollar a boost.

EUR/USD was stuck at the 1.3360 zone, with some brief and limited attempts to test some upside at the 1.3380 zone, but the 1.3412 year highs were never under threat.

Much to the opposite, the US housing data showed strength as the pending home sales came out higher than expected. These sales rose 0.7% M/M in February and these are seen leading the existing home sales, so have some influence on market sentiment on the housing market and thus on financial markets worried about this issue lately. We wouldn??™t run too far away with one positive outcome of this very volatile indicator.

Despite this USD upturn yesterday, the EUR/USD upside should still be favoured in a buy-euro-on-dip scenario. This is kept in place as long as the pair can manage to stay above recent lows at the 1.3260 zone.

Today, the market will turn to another concern, the labour market. The ADP employment report will be gauged, as there are some concerns for a softer than expected payrolls report this Friday, as the ISM employment component disappointed.

The market will also watch the EMU PMI services reports, the US factory orders and the ISM non-manufacturing reports today for guidance. Any signs of economic weakness, although not expected in today??™s data, would bring back dollar doubts.

USD/JPY broke out to the upside yesterday. It was a slow gradual move, removing the upside resistance at the 118.50 zone, reaching up to the 119 area, as continued yen softness gave it away.

The break above 118.50 is a short-term negative for the yen. It confirms the picture as it has been developed so many times, namely that periods of yen strength are short and violent and then are followed by a prolonged period of slowly developing yen losses. This permits USD/JPY to almost quietly creep higher and higher. It is typical for the continued build-up of carry trades, selling the yen for other higher yielding currencies.

The slow nature of such developments makes it probably easier to digest for the markets and often keeps it below the radar of such institutions like the G7. It is highly unlikely that the yen will be discussed at next week??™s G7 meeting in Washington (Friday Apr 13). That the yen would not be a topic was already confirmed by Japanese and Canadian sources over the past days.

Today, the US data will probably be guiding for the USD/JPY cross as well. This morning, some comments by BoJ??™s Muto only confirmed all the clich?©s about the Bank and had no market impact whatsoever.

The RBA overnight decided to keep rates on hold in Australia. This hurt the Aussie dollar in a spikish movement at first, but the dollar quickly regained its feet and rebounded back to pre-announcement levels. The carrot of a rate hike next month is working miracles we guess??¦

The UK is also thinking on a BoE rate hike this Thursday. It also may be postponed for now, but also in the UK, as in Australia, it appears to be merely a matter of time, with next month more likely than this week to see a rate hike. But with the Bank of England one never knows; they are known to surprise the market at times.

EUR/GBP yesterday painted a sideways picture at the mid 0.67 area in the absence of fresh drivers.

We continue to point out the FX market has been too negative on the UK economy and the sterling and call for the sterling rebound to go on for a while further. The 1st target of the H&S formation is seen at 0.6723.