Looking At The Fed & The Yen

With the USD already much stronger on the markets anticipation of a Fed lift off this year and with speculation building around the likely extent of this lift off, it appears prudent to begin scouting medium-long term USD buying opportunities.

The strength of the USD is now transitioning away from being solely reactive to and dependent on a Fed lift off and now partly more concerned with the economic performance of the US in the period following rate hikes as compared to other potential capital recipients. Without sustained improvement in the US economy it isn’t a done deal that the USD will outperform other currencies.

Although very recent US data has been weaker than expected, the outlook for or the US economy is strong. We have seen housing market indicators experiencing a stable period of growth over recent months and with low mortgage rates, low energy prices and improved confidence they may see a ramp up in coming months with a “search-for-yield” driving up investor interest.

The Home-Builder S&P500 Equity Sector Index in the US rose to 2.8% on Tuesday, marking a new record high. Along with consumer discretionary this has been one of the strongest US sectors in recent months, supported by lower energy prices.

Data from the CME Group FedWatch Implied Probability tool shows consensus is based around an expected 0.25% lift off, should the Fed come in higher than, USD should strengthen considerably.

So Whats The Trade?…

A hike in US rates is likely to shift attention to JPY as a funding currency and should see the currency weaken over a 12 month period. The Yen is already down sharply in the past six months and positioning is extended. JPY is stalled recently despite the strong rate hike anticipation on the back of the better than expected January employemnt print and this reflects the extent of the extended short specualtive trading positions and a reluctance by many to sell year to date lows.

Given that the political motivation on Japan might be to prevent a further signiciant weakening of the JPY ahead of April elections, JPY is likely to range a while longer., in a pattern similar to that of the last two periods of consolidation. Ultimately, capital outflow from Japanese investors should provide support for USDJPY and with the current consolidation having lasted around three months, confidence is growing that the base at these levels is solid and rising.

$USDJPY (Daily)  19_12_2012 - 25_02_2015

With the basing moving higher, it is time to re-establish USDJPY long exposure, especially so given the lift in US yields since January and the likelihood that we are within moths of a US rate lift off.

As such I will be monitoring price action and Order Flow Indicators to set longs targeting the 2014 highs initially.

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