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USD/JPY catapults through the 100 mark on weight of speculative buying

Posted in Currencies

By Mike Jones

NZD

Currency markets exploded into life overnight, ensuring this week’s NZD rollercoaster ride continued. Having bounced back above 0.8460 yesterday afternoon, the NZD/USD crashed back below 0.8370 overnight.

Last night’s currency market action was all about USD/JPY. The pair was finally catapulted through 100 as the weight of speculative buying finally wore down option defences around the figure.

With the USD riding high, all of the major currencies have come under pressure. The NZD/USD has been no exception, although it has held up better than most.

In fact, the NZD has outperformed nearly everything over the past 24 hours.

This of course reflects yesterday’s upbeat NZ Household Labour Force Survey. Its employment measure bounced 1.7% in Q1, sending the unemployment rate down to 6.2%, from 6.8% in Q4.

This occurred despite a rebound in the participation rate to 67.8%, from 67.2%, completing a trifecta of positivity in the headline results.

With the HLFS providing yet another example of NZ’s economic outperformance, a push higher in NZ swap yields further enhanced the relative yield appeal of the NZD.

NZ-US 3-year swap differentials increased to 250bps yesterday.

Australian employment statistics also made for pleasant reading yesterday (50.1k jobs added vs. 11k expected). But this didn’t stop the NZD/AUD from heading higher.

After briefly slipping to 0.8250 the cross has bounced back to 0.8300 overnight as the stronger USD took a relatively heavier toll on the AUD.

We’ve been warning folk for some time about the risk that ‘extreme’ speculative long positioning eventually forces a near-term NZD correction as these positions are ditched.

It seems we are in the middle of one such correction now. The fortunes of the USD/JPY and Asian stock markets today will determine whether it continues.

While the lower NZD/USD is likely to draw out some exporter buying today, we suspect this will be offset by selling from momentum and leveraged players.

As a result, the NZD/USD should stay heavy today. Bounces should be limited to 0.8425, with 0.8360 the key near-term support level to watch. A convincing break below here would pave the way for a move back onto an 0.8200 handle.

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Majors

The USD has roared higher in overnight trade, driven by an almost two figure surge in USD/JPY. This, despite a distinct lack of action in other markets, and a dearth of economic data. The narrow DXY index has climbed almost 0.8% to 82.60.

All eyes overnight were on USD/JPY, as the pair finally flew through 100. The move doesn’t appear to have been driven by any particular piece of news or data.

USD sentiment did receive a boost from some solid jobless claims data (323k vs. 335k expected) and chatter that China may raise the proportion of its reserves held in USDs.

However, heavy buying by speculators gunning for 100, and the destruction of option barriers around the figure, were the bigger drivers.

Having climbed steadily from below 99.00 to 99.90, stop/loss orders were triggered just below 100, launching the currency to 100.60.

The USD/JPY gains soon kick-started a broader bout of USD buying, such that all of the major currencies have notched up declines. The EUR/USD led the way, sliding from 1.3150 to around 1.3040.

The losses in GBP were more limited thanks to some less downbeat UK data. There were no surprises from the Bank of England with both rates and its asset purchase target left unchanged at 0.50% and £375b, respectively.

But some impressive gains in UK industrial and manufacturing production lifted GBP/USD up to 1.5580 before the stronger USD later dragged it back to 1.5440. EUR/GBP slipped from 0.8470 to 0.8440.

Looking ahead, a speech from Fed chairman Bernanke tonight looks unlikely to matter much for markets given the topic (bank stress testing). The same can be said of the G7 finance ministers meeting beginning tonight.

Instead, all eyes will remain on USD/JPY as a broader driver of USD sentiment. While some pause in the recent gains look likely as investors lock in profits ahead of the weekend, we suspect buyers will emerge on  any dips towards 100.25 today.

Other news:

*Bank of Korea surprises markets, cutting rates 25bps and pointing to the slide in the JPY as a factor behind its decision.

*UK March manufacturing output +1.1% m/m (consensus +0.3%), industrial production +0.7% m/m (consensus +0.2%). The ONS said this data will have little bearing on Q1 GDP.

*China April CPI exceeds expectations marginally, rising to 2.4% from 2.1% (2.3% expected).

Event Calendar:

10 May: AU RBA SoMP; G7 finance ministers/central bankers meet; US Fed’s Evans, Bernanke, and George speak.

All its research is available here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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