By: Editorial Team, StoneX Media
Currency intervention normally gets judged on how long price stays down, but the variable steering dollar yen right now sits several thousand miles from Tokyo. Federal Reserve rate hike odds, not Bank of Japan policy, are what hold dollar yen higher, because hawkish commentary from Federal Reserve speakers has offset a run of softening U.S. data. Consumer price inflation cooled, producer prices cooled and retail sales contracted, and the dollar barely flinched. That gap between what the data shows and what policymakers are signaling is where the next dollar yen move gets decided.
James Stanley is a Senior Strategist at StoneX Media whose market career began in equities in 1999 and expanded into options, fixed income and foreign exchange, and he covers price action and macroeconomics on an event-driven basis across medium-term time frames. Reading USD/JPY through Federal Reserve pricing means tracking rate expectations and currency positioning together, which is the cross-asset ground Stanley works across day to day.
"I think that overly hawkish lean from many Fed speakers has at least partially offset some of the soft U.S. data", Stanley says, describing a stretch in which consumer price inflation, producer prices and retail sales all came in weaker and dollar yen still held its ground. The clearest example came from Beth Hammack of the Cleveland Federal Reserve, who signaled readiness to raise rates with consumer price inflation running near 3.4%, having been unwilling to hike two months earlier when the same measure sat closer to 4.2%. Specifically, that reversal tells currency traders that softer prints are not automatically dovish, because the reaction function itself has shifted. For anyone trading dollar yen, it means the data calendar matters less than how Federal Reserve officials choose to read it.
Federal Reserve rate hike pricing is the reason every USD/JPY dip has been bought rather than extended, with roughly a one in three probability attached to no hike into December and two in three to a hike arriving. Each soft release has produced a jolt lower and then a recovery, and the most recent pullback formed a higher low, evidence that positioning is getting more aggressive rather than more cautious. The reversal trigger, in Stanley's view, has not arrived yet, and he is specific about what it would look like. "What I think could become that, which we're not at yet, is if we see these rate hike odds in the U.S. completely get priced out". Until that repricing happens, dollar yen support levels keep attracting buyers regardless of how weak an individual U.S. print looks.
A durable dollar yen reversal depends on U.S. growth deteriorating far enough to shake carry traders who have held positions through years of yen weakness, not on anything the Bank of Japan announces. Contracting retail sales point that way, though the GDPNow forecast has simultaneously pointed to strong growth, leaving the underlying picture genuinely mixed. Stanley is also clear that reversals rarely come from the risk everyone is already watching, noting that the moves which finally break a trend tend to be surprises rather than the widely expected factor. According to Stanley, the missing ingredient is straightforward, because "we're going to need evidence that there's recessionary potential building in the U.S.".
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--- Written by Gus Farrow, Senior Manager, StoneX Media
--- Expert: James Stanley, Senior Strategist, StoneX Media
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