Date: 15 Jun 2017

Writing before Wednesday’s decision by the Fed to raise US rates by another 0.25 percent, US Bank BNYMellon wrote that “it is difficult to ignore the fact that the USD’s dismal performance year-to-date has coincided with a marked flattening of the US yield curve (at least as measured by the 2s/10s and spread – currently 84 bp down from 128 at the start of the year).”

On Wednesday, preceding the Fed decision, sub-expectation US inflation and retail sales data had seen the 10-year US Treasury yields fall to their lowest level since November and that drop was not fully retracted after the Fed made its decision and even though the US central bank maintained it still intended to tighten monetary policy further.

Yet dollar/yen (USDJPY) which touched an eight-week low of 108.81 on Wednesday rebounded in Asia on Thursday to the mid-109s. Admittedly, Thursday was a Gotobi day (a date that is a multiple of five) in Tokyo. Japanese importers have a reputation for hedging receivables on Gotobi days, supporting demand for dollar/yen on these days as their fallback hedging requirement is to sell yen.

Of course, the drop below 109 on Wednesday, before Gotobi day began, might also have flushed through downside stops but without giving time for Japan’s importers to hedge on a 108 handle.

Traders who sympathise with that logic would, therefore, see Thursday’s Asia session bounce in dollar/yen as understandable even if 10-year US yields haven’t bounced (and with the fixed income market has pared its expectations for another Fed hike in September).

As for Thursday’s European session in USDJPY, traders might wish to bear in mind that ThomsonReuters IFR’s (TRIFR) observations are that the more material option expires in dollar/yen are nearer 110 than 109.

TRIFR wrote Thursday morning of almost 850 million dollars of London cut (1500h London time) expires (xxx) at 109.98-00 with another 1 billion in the 109.40-70 level.

On the downside, TRIFR has identified some 650 million dollars of xxx at 109.00-05 today. But that’s not all. Traders should also be aware of very large xxx with a London cut on Friday.

TRIFR sees 2 billion dollars of 109.00s rolling off on Friday at 1500h London time with a huge 3.38 billion dollars of expiries at 110.00. However traders see the direction of dollar/yen in coming sessions, the existence of option expiries on this scale may exert an influence on the price action.

 

Written by Neal Kimberley, External Currency Analyst.


All financial products traded on margin carry a high degree of risk to your capital. Any forecasts given are not a reliable indicator of future performance and the decision to act on any ideas and suggestions presented is at the sole discretion of the reader.