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Will the Fed Push USD/JPY to 115?

  • Kathy Lien
  • 1 November 2017
Daily FX Market Roundup 10.31.17
 
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
 
Tomorrow we have the Federal Reserve's second to last monetary policy announcement of the year and while no changes are expected, they are widely expected to set the stage for a year-end rate hike.  The U.S. dollar is trading firmly against most of the major currencies ahead of this key event and if the Fed is sufficiently hawkish, we will see USD/JPY above 114 and possibly even near 115.  Fed fund futures show the market pricing in 0% chance of tightening in November and an 85% chance of a hike in December.  This means the Fed needs to be unambiguously hawkish in order to avoid a sell-off in the dollar.  If anyone dissents and favors an immediate tightening, the dollar will rise with USD/JPY taking aim at 115 if there are 2 or more dissents.  Taking a look at the table below, there has been widespread improvements in the U.S. economy since the last Fed meeting and with the progress being made on tax reform and stocks hovering at or near record highs, there's plenty of reasons to justify a hike. Consumer spending and consumer confidence is up, average hourly earnings increased significantly in September, inflation increased with improvements seen in manufacturing and service sector activity. 
 
For all of these reasons we believe that the dollar will rise into and on the back of the FOMC rate decision.  Unlike last month's meeting when a press conference followed the rate decision this time we only have the FOMC statement.  But that can still be enough to excite dollar bulls.  We're looking for a move up to 114.50 on the back of FOMC but if there are a number of hawkish dissents, we may even see the pair break 115.  There's no question that investors are bullish dollars ahead of this event so in the unlikely chance that the Fed raises fresh concerns, giving investors reason to believe that next month's hike will be a dovish one, USD/JPY will fall quickly and aggressively and the unwind could take the pair as low as 112 in the hours that follow.  The Bank of Japan also left policy steady last night, adding pressure on the Japanese Yen.
 

 

The commodity currencies were hit the hardest by dollar strength with the Canadian dollar leading the losses. Weaker than expected GDP growth along with dovish comments from the Bank of Canada extended the currency's slide. Economists were looking for 0.1% GDP growth in August but instead, the economy contracted by -0.1%. BoC Governor Poloz said that while the sources of Canadian growth has broadened, he plans to be cautious with rate adjustments because there's signs of slack in the labor market and as they are in a crucial spot in the economic cycle because of the high level of household indebtness, they do not want to nip the recovery in the bud by raising interest rates again too soon. They also feel that the economy is primed and ready for a new capacity phase and they don't want to threaten the opportunity by tightening prematurely.  Although USD/CAD has enjoyed a strong rally, we believe that the move will extend to 1.2950 and possibly 1.30 before it stalls.  The New Zealand dollar had initially been trading poorly against the dollar but turned around completely after a strong employment report. Not only did job growth rise 2 times more than expected but the unemployment rate also dropped to an 8 year low of 4.6%.  What made the report even more encouraging was the uptick in the participation rate that made this one of the most unambiguously positive New Zealand economic reports that have been released in sometime.  Although the report is backwards looking it should be significant enough to carve out a near term bottom for NZD/USD above 68 cents. We now expect the pair to drift up to 70 cents. The Australian dollar on the other hand remained weak with private sector credit and new home sales falling short of expectations.  
 
Unlike the commodity currencies, Euro and sterling outperformed the greenback. While Spain's political troubles continue on, investors were encouraged by stronger third quarter GDP growth.  The Eurozone economy expanded by 0.6% in Q3 with this growth driving the year over year rate to 2.5%, the highest level in more than 6 years.  This report overshadowed the slowdown in CPI growth and kept EUR/USD firmly above 1.16.  Sterling on the other hand is supported by the prospect of hawkish comments from the Bank of England on Thursday.
 

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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