Dollar, Yen in Selloff Mode Following Inflation and PMIs

As the week begins, the dollar and the yen rally modestly, recouping some of last week’s losses. So far, buying momentum in both currencies has been sluggish, and neither appears to be nearing a bottom. The New Zealand dollar soared early today as consumer inflation statistics came in substantially higher than predicted. However, the rise in Kiwi was short-lived. Nevertheless, the markets are consolidating, and we expect more dollar and yen weakness later this week.

On Friday, the US dollar remained flat against the major currencies. For the third day in a row, the dollar index closed at 94.00. While pound strength was countered by yen weakening in the index, the EUR/USD remained constant at 1.1590. After Friday’s robust Retail Sales report, early selling pressure on the US dollar was relieved as US rates firmed across the curve.

This week, PMI data from Australia, Japan, the United Kingdom, the Eurozone, and the United Kingdom will be the main focus for insights into growth, employment, and inflation. Inflation figures will also be released by the United Kingdom, Canada, and Japan. The Bank of Canada’s business outlook survey, the Reserve Bank of Australia’s minutes, and the Federal Reserve’s Beige Book report will all be closely monitored. In addition, China will disclose a package of recent economic data, which may cause Asian markets to tremble.

In the wider context, a pattern of currency price appreciation from those on a shorter-term climbing path is beginning to emerge in the developed market area. The Fed taper remains the most important factor, and the lineup of Fed speakers this week will likely provide further clarity in this regard. The dollar is also supported by rising oil prices.

USD/JPY Upward Movement Fueled by Rising Dollar Yields

The USD/JPY pair will also benefit from rising US yields, which our rates team expects to rise further as market tightening forecasts approach closer to the Fed.

“Japan’s monthly trade deficit is likely to expand to around JPY500 B.” As the market gets its teeth into the energy dependency story, any bigger imbalance might present USD/JPY with a nudge through 115.00.”

The pair keep a tight eye on the price of US Treasury yields, tracking along with the benchmark 10-year rates. The currency pair was driven back towards the multi-year highs set on Friday by a further rise in yields.

The 10-year rates, on the other hand, appear to lack a follow-through upside bias over 1.60 percent, putting a stop to USD/JPY’s attempt to reclaim three-year highs. As the risk tone stays lower moving into early European trading, the downside in the major remains cushioned by the surging US dollar.