DOLLAR-YEN COMES OUT OF THE SHADE

DIRECTOR OF CURRENCY RESEARCH, GFT

AFTER DROPPING to a low of ¥80.93 at the end of last year – a move that induced more than a few heart palpitations among policy makers in Tokyo – dollar-yen has steadily climbed higher in January as the American economy has shown clear signs of improvement. Today’s federal open market committee (FOMC) rate decision could set the tone for the rest of the week.

No one in the capital markets anticipates any major news from the Fed, but traders will be looking for any clues in the communique that could signal a possible change of posture in the near future. Given that weekly jobless claims have consistently held below the 450,000 level since November, the Fed may upgrade its assessment of the American economy. The improvement in the labour market is gradual and therefore unlikely to have any immediate impact on the Fed’s continuing policy of quantitative easing (QE), but if markets become convinced that US monetary officials will not expand the QE program beyond the current $600bn limit, dollar-yen could strengthen.

GDP DATA IS KEY
In addition to the FOMC meeting, the currency markets will also focus on the release of US fourth quarter GDP data due on Friday at 13:30. Consensus calls are for a significant increase to 3.5 per cent from 2.6 per cent the quarter prior. If the GDP data meets or beats market expectations it will help to confirm the bullish recovery thesis providing more fuel for the dollar-yen rally.

Dollar-yen has spent the beginning of 2011 trading in a very narrow range between ¥81.00-¥83.00 as most speculative flows have been focused elsewhere. It’s possible that the pair may remain neglected as the euro continues to set fresh highs every day, but if this week’s US economic data surprises well, dollar-yen may finally attract attention. If dollar-yen can break above the long term resistance at the ¥84.00 level it could be the start of a larger rally towards ¥90.00.