USD/JPY Dips But U.S. Dollar Bulls Remain In Control

Investors continued to buy U.S. dollars on Thursday despite weaker-than-expected Philadelphia Fed manufacturing index and jobless claims. Market participants are convinced that these disappointments will fade as the economy improves because the Federal Reserve’s upgraded economic projections gave everyone the confidence that the recovery will gain traction. With that said, USD/JPY fell from its highs after U.S. data. Other major currencies quietly trickled lower versus the greenback. The U.S. dollar maintained its bid because the Federal Reserve gave bulls everything they hoped for on Wednesday. It admitted that it may be time to talk taper, pulled forward its rate hike forecasts and upgraded nearly all of its economic projections. Chairman Jerome Powell admitted that inflation could be higher and more persistent than they anticipated.


Thanks to the Federal Reserve’s hawkish economic forecasts, the U.S. dollar’s outlook is strong. Investors will continue to look past data weakness and focus entirely on central bank comments in the U.S. and abroad. The quiet period for U.S. policy-makers is over and it will be interesting to see if their language changes as well. Given the moderate sell-off in stocks and decline in Treasury yields on Thursday, U.S. policy-makers should feel comfortable confirming that discussions about reducing asset purchases should begin, which would be positive for the U.S. dollar.


Traders should keep an eye on stocks. Reducing asset purchases and advancing the time line for raising interest rates are bearish for equities. The losses in the S&P 500 have been limited, but the Dow Jones Industrial Average closed lower for the ninth straight trading day, its longest stretch of weakness since March 2017. Further losses in equities will drive Yen crosses lower and compound the U.S. dollar’s gains.


Demand for the greenback completely overshadowed better-than-expected economic reports from Australia and New Zealand. Australia reported the strongest one-month increase in jobs since October. At 115,000, it was three times greater than anticipated, with solid full- and part-time job increases. The unemployment rate, which was expected to hold steady at 5.5%, fell to a pre-pandemic low of 5.1%. Both Australia and New Zealand’s labor markets have now returned to pre-pandemic levels. The New Zealand economy grew 1.6% in the first quarter, three times faster than anticipated. Year over year, GDP growth accelerated from -0.8% to 2.4%. These reports should have been wildly positive for AUD and NZD, but they were two of the day’s worst performing currencies.


The weakest currency was the Swiss Franc, which dropped nearly a percent against the U.S. dollar. Central bank monetary policy pergence is becoming increasingly important and, in the case of the Swiss National Bank which met this morning, its decision to affirm its -0.75% interest rate highlighted the widening gap between U.S. and Swiss policies. The Bank of Japan meets tonight, and it is widely expected to keep monetary policy and its forward guidance unchanged.


The most resilient currency was sterling. Retail sales numbers are due for release tomorrow. Like inflation and employment, the risk is to the upside. Economists are looking for spending growth to slow after last month’s strong rise, but ongoing reopenings and the sharp rise in average hourly earnings suggests healthy retail demand.

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