Reply #5: daily dollar watch

[UpInArms]

http://quotes.ino.com/chart/?s=NYBOT_DXY0

Last trade 84.94 Change +0.52 (+0.62%)

Dollar Yen: Where Are We Headed Next - 104 or 110?

http://www.dailyfx.com/index.php?option=com_content&task=view&id=515&Itemid=46

With the sharp surge in USDJPY over the past week, a major question on the minds of our traders is where USDJPY is headed next - back down to 104 or up to 110. The next move for the Yen, aside from being led by the US dollar is primarily contingent upon 2 factors - oil prices and Chinese Revaluation.

*Republishing from 3/30

The following is a scenario analysis that we have prepared for USDJPY:

What Will Cause the USD/JPY to rally to 110?

1. Oil will hurt both input costs and consumer demand
2. Deflation remains solidly negative creating carry trade opportunity
3. Technicals Support Further Move Upwards In USDJPY

Oil Prices Continue To Rise, Hurting Japanese Growth

With West Texas Intermediate Crude stubbornly hovering around record highs of $57/bbl, Japanese corporations will suffer a double blow to their bottom lines as input costs ranging from energy to basic raw materials such as steel will increase markedly at the same time as global demand for exports decline due to contracting disposable income. Although Japan is one of the most energy efficient nations in the world, it still imports 99.5% of its crude oil needs and is therefore the most vulnerable G-3 member to rising oil prices. If oil prices continue to rise, Japan's economy could face further deterioration, which could lead to more losses for the Japanese Yen. This vulnerability has taken a huge toll on the Japanese economy, which is clearly evident in the latest string of weaker economic data. The Trade Surplus narrowed to 1550 Billion JPY from 1776 Billion JPY the month prior as a direct result of higher input costs. The unemployment rate in Japan increased from 4.5% to 4.7%, with the number of employed individuals falling for the first time in three months. With worsening labor market conditions, household spending fell by a more than expected 4.1%. Wage growth in Japan has been weak, resulting in a fall in income. This has also impacted retail sales, which slipped more than expected on an annualized basis. With oil prices raising the cost of basic necessities in general, Japanese consumers are even more pinched than before.

Deflation Remains a Problem and USDJPY Becomes New Carry Trade

With consumer prices on a national level, falling for a second consecutive month (-0.3% on year/year basis), deflation remains a chronic problem for the Japanese economy. Because deflation is still rampant, Japanese companies have little power to increase prices and therefore try to increase profits by cutting costs and reducing wages. The latest unemployment release showed a muted growth in labor cash earning of only 0.1%, while hours worked actually declined by 1.4% in the latest period. The net result of this dynamic is lower consumer confidence (the Eco watcher survey has been below 50 for six straight months) and lower consumer spending as evidenced by a sharp drop in Household Spending which registered a -3.8% decline from last year. This vicious cycle of contracting consumer demand and stagnant wage growth is likely to continue for the near term forcing the Bank of Japan to maintain is ultra accommodative monetary policy and keep interest rates at zero. With US rates now at 2.75% the interest rate differential is already at 275 basis points and may expand to as much as 425 basis points if the Fed continues to pursue it tightening policy. Such a rich premium is likely to attract a slew of carry trade speculators who could conceivably earn 42.5% annual returns on 10:1 leverage basis. The inflow of speculative carry trade capital could easily push the USDJPY pair above the 110 level as more and more players crowd into the trade.

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Dollar U-Turns Despite Weak Retail Sales Report

http://www.dailyfx.com/index.php?option=com_content&task=view&id=715&Itemid=39

EURUSD

There was quite a bit of volatility in the FX markets today as prices U-turned once again following the release of US retail sales data. Retail sales came in much weaker than expected, causing the Euro to skyrocket above 1.30, but on what may be the perfect scenario of buy the rumor sell the news, the dollar reversed course, trading right back below 1.29. With nothing to explain the move, the rumor mill was in full swing with the market talking about possible short covering by a large US investor - Warren Buffett's name has come up quite a few times as well as possible concern by Asian central banks about diversifying into the euro at this time given the increasing likelihood of a referendum rejection of the EU Constitution by the French. Nothing was verified, which suggests that right now, it is all about Friday's TIC data. Across the Atlantic, unsurprisingly French inflation came in higher than expected, as a direct result of energy prices. Italian industrial production was a bit weaker which underscores the difficulty that Eurozone countries are facing. Although ECB Issing said that there are no second round effects from oil prices, higher energy prices has undoubtedly taken a toll on growth during the month of February.

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USDJPY

The yen strengthened after last night's inflation data was released. Japan's consumer price index increased for the 13th month in March. This eroded the profits of companies that are already struggling to pass on costs amidst seven years of consumer price inflation. The domestic CGPI rose 0.3% on the month, a modicum above the expected 0.2%, as higher costs of oil products, metals and other commodities pushed the import price index up 1.8% following February's 2.8% increase. Prices of gasoline and oil products rose 16.5% in March, contributing half of the overall increase. Steel and chemicals prices also rose substantially. Meanwhile, export prices have not risen nearly as much with a 0.7% monthly change. Oil-related concerns were a major reason the March Tankan survey showed that business sentiment was deteriorating, but today's price action might have given manufacturers a reason to cheer as crude oil fell by as much as 4.2% after the International Energy Agency cut its forecast for world fuel demand. The news would of course be yen-bullish as Japan imports almost all of its oil.

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That 'toon is spot on, Ozy :applause:

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Have a Great Day Marketeers!