Japanese Yen Steady Despite 10-Yr Tankan High, USD/JPY Tiring

The large manufacturing Index hit 22, its highest level since September 2007 and well above the 18 print expected. The large manufacturing outlook index hit 19, again well above the expected outcome which was 16. Small manufacturing also did well with output there at its best level since 2006. The survey wasn’t quite all good news though, with a few outlook indexes missing forecasts and planned capital expenditure doing likewise.

That said it did show a Japanese economy heading into the year’s final quarter in pretty good shape, but the Yen is disconnected to some extent from its own country’s economic numbers. Last week’s manufacturing data were similarly perky and similarly failed to budge the currency. The BoJ’s position is that ultra-loose monetary policy will not change until annualized consumer price inflation is sustainably above 2%. It’s at 0.7% presently so there’s a long way to go. While the BoJ sticks to that script, the economics have little chance of moving monetary policy and so little change of changing the Yen’s investment case.

This disconnect was clearly seen again on Monday, although market holidays in China and Australia will have seen markets more shallowly traded in any case. There is also an election looming in Japan which will see economics play second fiddle to politics until the results are known at the end of this month.

There was some good news for the BoJ on this front from the Tankan. Japanese firms continue to face labor shortages which raises the hope that previously elusive meaningful wage rises will bolster the economy’s pricing power.

The Yen has been under pressure against a generally stronger US Dollar for a month now, with USD/JPYrising sharply. That process seems to have run out of a little steam at present but, with interest-rate differentials so strongly in the greenback’s favour, and only likely to get more so, it is hard to see the Yen fighting back in the final three months of this year.

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Will Dow and VIX Continue to Defy Seasonal Norms in Q4?

Typically, the end of the quarter is marked by rebalancing and easing on excessive, one-sided exposure. That wasn't the case through the close of the third quarter this past week. Already pushing a record high, US equities furthered their charge before the week, month and quarterly end. Perhaps the most remarkable performance comes on behalf of the S&P 500 which not only charged a record high into the close but generally closed out its eighth consecutive quarter advance for a cumulative 31 percent gain over the period. Neither growth, global capital flows nor returns have paced this climb in asset prices; but that still does not seem to be a concern for those market participants content with throwing in with the exuberance. Similarly, the VIX volatility index's push to 9.5 marks the extreme appetites prevailing in the financial system. This level would suggest a crystalline view of stoic markets through the coming month with no potential for North Korea, financial instability or economic trouble possible. It is the fear of missing out (FOMO) and moral hazard mentality that stands as the backbone for our markets today.

To suspect that outside forces (central banks or governments) can thwart any unknown developments to make us as investors whole is a profoundly complacent - and risky - view to maintain. Few would admit to that; yet as a market, the collective exposure leans this way. The mentality of 'taking advantage of trend while it is here' and confidence that those with risky exposure can identify a change in conditions to beat a hasty exit prevail. It should be said, that that is the belief held in all bubbles through history. Heading into the final quarter of the year, it is a good time to evaluate the risk-reward potential in throwing in with the complacency trade. Probability may favor it slightly, but the potential imbalance is increasingly extreme for disorderly deleveraging. I remain skeptical of the long equities and short VIX exposure that is so popular. Discounted 'risk' markets like Yen crosses are moderately better, but that doesn't make them 'good' trades under most circumstances.

With the look to the FX market into the new week and quarter; the US Dollar still holds the greatest potential. Its bullish turn is still uncertain and very early. This past week, the Fed's favorite inflation indicator (PCE deflator) ticked lower through the core reading, but that is unlikely to alter the upgraded conviction in policy tightening we saw over the past few weeks in rhetoric in deed. In the week ahead, there is another Yellen speech, the ISM's activity reports, NFPs and Moody's credit rating for the country. Yet, speculation will likely matter more. I still like the look of the EURUSD and GBPUSD positions I have taken, but momentum has flagged. USDCAD and AUDUSD deserve monitoring as well. For the Euro, the Catalonia referendum is seen as being a non-event, but that makes for a particular bearish skew if something does happen. Two currencies with technical and fundamental appeal moving forward are the Aussie and Canadian Dollars. The former has the RBA decision and latter week-end job statistics. Both are known market-moving events, but it is the context that truly matters. We discuss what kind of markets we are trading/investing in heading into a new quarter as well as trade opportunities that can solidify in this weekend Trading Video.

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Dollar Ends Week with Gains, Supported by Yellen

The US dollar ended the week with gains against most major currencies (but not versus the Great Britain pound). The reason for the good performance was the outlook for monetary tightening, supported by comments from Fed Chair Janet Yellen.

For the whole week, traders were waiting for Yellen’s speechat the Jackson Hole Meeting, hoping that she might reveal timing for the next interest rate hike. In reality, she did not provide a specific date, but hinted that it may happen soon, though the exact timing depends on economic data:

Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.

Bets on a hike this year rose after the announcement.

While the dollar ended the week as the second strongest currency, the first one was the pound. Strong macroeconomic indicators released from the United Kingdom eased concerns about impact on the Brexit on the UK economy, making the sterling more appealing to investors.

EUR/USD dipped 1% from 1.1307 to 1.1192 during the week. GBP/USD ticked up from 1.3073 to 1.3127, touching the weekly high of 1.3272. USD/CHF jumped 1.8% from 0.9607 to 0.9779.

If you have any questions, comments or opinions regarding the US Dollar, feel free to post them using the commentary form below.

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Yen Suffers from Fischer’s Comments

Riskier currencies reacted negatively to the comments that Fed Vice Chairman Stanley Fischer made on Sunday, but safer ones, like the Japanese yen, were also not immune to the impact.

As many other currencies, the yen opened sharply lower against the US dollar, though also versus other most-traded rivals. The tightening stance of the Federal Reserve is in sharp contrast to the easing bias of Japan’s central Bank. That makes the Japanese currency especially vulnerable against the greenback.

USD/JPY traded near the opening level of 100.72 as of 8:54 GMT today after settling at 99.87 on Friday. EUR/JPY traded at 113.78 after closing at 113.38 on Friday and opening at 113.93 on Monday.

If you have any questions, comments or opinions regarding the Japanese Yen, feel free to post them using the commentary form below

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Week Ends with Losses for US Dollar as Policy Outlook Mixed

The US dollar continued to be driven mostly by monetary policy outlook during the past trading week. Unfortunately for the currency, the outlook was not particularly supportive, though it has changed a bit by the weekend.

The dollar was rather soft for the most part of the week as most market participants remained skeptical about chances for the Federal Reserve to continue monetary tightening in the near future. Fed minutes released during the week were not helping as they have shown division between US policy makers in the view of appropriate timing to raising interest rates again. Things improved a bitfor the greenback before the week ended as comments from various Fed members were starting to convince some traders that a rate hike is still possible.

Yet overall, the policy outlook remains unsupportive for the dollar. According the to the CME FedWatch site, chances for a hike in December are just little above 50% while only 12% of speculators bet on a raise in September. The only saving grace for the US currency is the fact that monetary policy of other developed nations’ central banks are also not supportive for their respective currencies.

EUR/USD rallied 1.4% from 1.1166 to 1.1327, and its weekly high of 1.1366 was the highest rate since the huge slump on June 24 when the Brexit announcement shocked markets. GBP/USD advanced 1.3% from 1.2917 to 1.3079. USD/JPY was down from 101.11 to 100.13, and its weekly low of 99.64 was the weakest rate since November 2013

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