Last week the Fed’s preferred measure of inflation- PCE numbers- were released on Friday. They will not have pleased Fed Chair Powell- a champion dove- as the Headline number increased year on year from 2.5% to 2.7%; Core remained at 2.8% y.o.y. This following on from official CPI figures of 3.5% headline and 3.7% Core y.o.y for March which were released earlier this month. Whichever gauge you use, they are both higher, and this will surely mean the Fed cannot implement an interest rate easing policy just yet.
Last Friday, the Bank of Japan held interest rates steady at 0-0.1%. The yen weakened considerably after US PCE numbers and also in Asia markets early on Monday. That is, until suspected intervention by Japanese authorities pre-London open which saw USDJPY abruptly weaken by about 500 pips from 160.245 to 155.01 before settling around 157.
The question to ask is whether Japanese MOF intervention is a sufficient deterrent to prevent traders jumping on the Yen carry trade? The carry is roughly +5% and multiply that by any amount of leverage you choose. If you can survive the sharp retracements, (say 3% a pop) or buy the dips, do you really think the Japanese will stage such large-scale intervention that they push the yen higher to say 140 vs the USD (on 31 Dec 2023 the USDJPY low was 140.81). I don’t! In my mind the risk reward favours long USDJPY, but beware it might be a choppy ride and every degree of leverage will amplify the bumpiness of that journey.
To this week and what better than a US interest rate decision to keep the dollar bulls happy? The Fed announces its decision on Wednesday. Consensus is for “unchanged” at 5.25-5.5%. In a massive week for US data, we have Consumer Confidence on Tuesday, posed to drop slightly to 104 for April from 104.7 (March), ISM Manufacturing PMI on Wednesday, where expectations are for a slight drop for April to 50.1 (previous 50.3). On Friday we also have ISM Services PMI where forecasts are for a rise to 52 for April (51.4 March). And not forgetting Non-Farm Payrolls with expectations of another bumper number (+243k) and the unemployment rate to stay steady at 3.8%.
For the those focused on Europe and Asia, the main figures are German preliminary inflation on Monday (exp 2.3% y.o.y for April), Eurozone preliminary Core inflation y.o.y for April (out on Tuesday) expected to fall to 2.6% from 2.9%, New Zealand employment figures (late Tuesday) where the unemployment rate is likely to have risen to 4.3%, Swiss inflation (out Thursday) and expected to remain around 1% y.o.y for April, and a Norges Bank interest rate decision on Friday, expect unchanged at 4.5%.
Should be a rollercoaster of a week!
Good Luck and Good trading!
Ben Robson is Head of Institutional E-FX at Swiss Finance Corporation. He is also the Amazon Best Selling Author of Currency Kings – How Billion traders Made their Fortune Trading Forex. McGraw Hill 2017
