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USD/JPY Looking For 100?

We have seen a clear downtrend in the USD/JPY since the U.S peaked in early April. The Coronavirus saw a rush to the cash, specifically the Greenback.

However, with the financial markets roaring back to life since then, the love for the Greenback has faded. Furthermore, many Japanese investors bringing back their capital out of U.S stocks back into their home currency, the Japanese yen. This has pushed the pair lower, with it currently sitting at 106.

This contrasts with the countries' main stock index, the Nikkei 225, which has reached all-time highs touching 30,000. The last time it got close to 30,000 was in 1991, where the index touched 26,000.

If you held the Nikkei 225 from 1991 till the start of 2021, you would have been down 0.4%. In comparison, if you have held the S&P 500 from 1992 till the beginning of 2021, you would have been up around 1000%.

USD/JPY Playing Well In The Channel

USD/JPY downtrend has been following a consistent channel

We can see the USD/JPY adhering to this downwards channel diligently, with a breakout in around June. We are currently witnessing a breakout similar to that in June, and if history is a guideline for the future, we may see the pair retreat back into the channel, possibly hitting the 100 mark in the middle of March.

Japan – A Currency Manipulator?

Many Asian nations, including Japan, have been accused of manipulating their currency, specifically to the downside.

It is estimated that foreign exchange reserves held by 12 Asian nations total more than 6.5. Trillion dollars, up 500 billion to counter the effects of the Coronavirus. Asian countries buy up foreign currency using their own, flooding the market with a flush supply of their currency, pushing their currency's relative value lower. This benefits their exports, as it would be cheaper to purchase their goods in other countries – beneficial when your country is dependent on exports, and you are in the middle of a Pandemic.

This could be why there has been a steady downtrend in the U.S dollar against the Japanese Yen. We saw a steady rise from the start of 2020 in Japan's foreign currency reserves from 1.34 Trillion U.S Dollars to 1.4 Trillion U.S Dollars, an increase of 660 Billion U.S Dollars.

NZD/USD at 0.77c by the end of 2021?

The New Zealand Dollar against the U.S Dollar has been a good barometer for the state of risk-on assets. It currently sits at around 0.7195, with technicals showing a possible strong move in the future. We now see a flat bottom wedge forming, with the wedge's completion seeing the NZD/USD make a violent move to the upside.

NZD/USD flat bottom wedge forming

Historically, the price is in an area prone to intense swings to the upside and the downside if we look left.  A move to the upside may finally bring 0.74c on the table, while a break of the flat bottom wedge before completion may see a move back to 0.70c. However, New Zealand's fortunate spot in eradicating the virus may allow tailwinds to support the technical possibilities.

Positive inflation numbers decrease the likelihood of further rate cuts

In the latter part of January this year, New Zealand's inflation numbers were better than expected at 1.2%, strongly surpassing analysts' forecasts of 0.2%. Jarrod Kerr, Chief Economist at Kiwibank in Auckland, stated that "the medium-term outlook for inflation looks stronger compared to just a few months ago."  Like many analysts, Jarrod has reversed his viewpoint for more RBNZ cuts this year. This comes as many New Zealand retail banks such as ANZ and Westpac see that New Zealand's sharp recovery due to successful Coronavirus measures is likely to affect further rate cuts coming down the line. Both banks have retracted their rate cut predictions.

Unemployment beats expectations

Analysts predicted a rise in employment in the past quarter, with the RBNZ predicting unemployment rising from 5.6% to 5.3%. However, with numbers showing a drop to 4.9%, any optimism in rate cuts has all but vanished. Capital Economics further emphasized their view that interest rates in New Zealand would rise from next year.

BNZ's Forecasts for RBNZ's Interest Rates

Both are no doubt positive for the New Zealand economy and its citizens. However, this will turn the New Zealand dollar into a missile. Stephen Toplis, Bank of New Zealand's head of research at Bank of New Zealand, stated that they are "formally building a rate hike [in their model] in May 2022" and that this may be "pouring fuel on the New Zealand Dollar that is already on fire." Many other senior economists are conveying the same viewpoint, with ASB's senior economist Mike Jones stating saying that the RBNZ's and fiscal stimulus "has done the trick, and no more is required."

With a surging house market, lower than expected unemployment, and higher than expected inflation, alongside favorable technical, the New Zealand dollar may be poised for a move upwards.

NZD/USD plunges on Lockdown, S&P500 surges

The New Zealand dollar has fallen against the US Dollar as New Zealand records new community transmitted cases since the last time 102 days ago.

New Zealand Dollar pushing down against the U.S Dollar as lockdown bites

After a rally in risk-on currencies, the New Zealand dollar has fallen over 0.75% over the past two days from its high from 0.6175 as the largest city in the country, Auckland, was put into a mandatory level 3 lockdown for three days. For reference, New Zealand uses a 4 level system, with four being the most severe of lockdowns imposing a mandatory stay at home order for all citizens, with only essential workers such as nurses and doctors allowed to work.

New Zealand citizens gearing up for another lockdown

Level 3 is less severe; however, it still imposes mandatory work from home orders if it is possible to do so. Schools and restaurants are closed. However, takeaways are allowed. Furthermore, only gatherings of 10 are permitted, with police roadblocks around the Auckland area to catch people going in/out of the city.

Prime Minister Jacinda Ardern urges citizens not to panic and panic buy at the supermarkets. However, queues have been seen stretching out the door at many supermarket chains, with police being required to be present to control the crowd of shoppers.

Queues at the supermarket as shoppers react to the late night bombshell from Prime Minister Jacinda Ardern.

New Zealand markets sell-off may be reactionary

In terms of the New Zealand dollar and New Zealand equities, this sell-off may be purely reactionary. New Zealand is doing far better than essentially every other country, including its bigger brother Australia. This may be a good time for bulls to enter the market. As we’ve seen with many other securities as of late, the market is quick to pounce on a beaten asset for the rebound.

S&P 500 and NASDAQ soldiering forward

Meanwhile, in the United States, we see the market edge higher, with the NASDAQ and Dow Jones climbing back to their all-time highs on useful US inflation data. However, the outperformer was the SP500 with cyclical assets such as energy stocks help push the index past its all-time highs.

S&P 500 pushes into positive territory year to date

The S&P 500 broke the 3,386 level, finishing the US trading session just under 3390, an all-time high.

This is a familiar picture with investors and traders who have been following the markets for the past couple of months – the market rallies on good news regardless of the relevancy, with the market discounting the bad news citing Fed liquidity propping up assets. Regardless, the rally in equities has been astounding, proving the wrong unbelievers of the “V-shape” recovery.

Barry Jones, manager at the James Investment research, stated that the rally in the equity markets has been “absolutely amazing” and that the market has “done the V-shape recovery that the economy has not” with the “stock market [plowing] right ahead.”

Futures pulled back slightly at the end of the US session, most likely gearing up for the retail sales figure this Friday. A better than expected result will most likely see the NASDAQ push up above its record high of 11,286 and solidifying the S&P 500’s push above its all-time high.

Future of the US Dollar

As the Coronavirus started to wreak havoc across the world, the US dollar stepped up as the world's de-facto currency. Risk-off sentiment drove investors and traders to the US dollar in droves, pushing the US dollar to highs not seen since 2017.

US Dollar Index

The world's de-facto currency, making up over 60% of all known central banks' foreign exchange reserves, saw the FED offering swap lines to central banks to provide liquidity in the market by "swapping" their currency for US dollars. However, the dollar's strength may be short-lived as the market sentiment cautiously shift to risk-off assets.

Risk-off shown by demand for FX Swaps for the US Dollar

Thanks to the FED's swaps, demand for the US dollar across the world have been met, restoring equilibrium in the market. This was shown in a chart from Steven Englander of Standard Chartered Plc,

There may be more headwinds for the US dollar. As we all know, everything depends on the assumption on how we emerge from the Coronavirus pandemic. If we assume that we shall see an economic recovery with the markets discounting a second wave, we should see the USD depreciate back to pre-coronavirus levels. Furthermore, there are a couple of other factors that may help the dollar depreciate

Quantitative easing increases the supply of the US Dollar

Federal Reserve's balance sheet

With the Fed's balance sheet swelling up to $7 Trillion, they have been loosening their limits on what assets they are willing to purchase. They have recently added corporate bond ETFs to the lists of assets they are ready to buy. With quantitative easing and stimulus comes an increase in money supply, which historically has seen the currency in question to depreciate (See Euro and the ECB in 2015, Government Stimulus in the US in 2009, and Bank of Japan in 1997)

Low rates for a longer time

"We are not even thinking about raising rates", Jerome Powell stated at a conference earlier this month, showing that they are willing to provide accommodative financial conditions until 2022. This also means investors may want to see their money earn a return else wear where yields are relatively higher, especially in EM currencies.

Higher oil prices

Since oil transactions are denominated in US dollars, there is an inverse relationship with oil prices and the US dollar. Correctly, as oil prices increase, the pressure is put on the US dollar as producers convert more US dollars to their home currency.

If we see a promising recovery, there is a high likelihood we a sharp depreciation in the US currency.