DOLLAR-YEN IS WAKING FROM ITS SLUMBER

UNTIL recently, the single most boring job in the currency business was to be a dollar-yen dealer. With the exception of a few days when the Bank of Japan (BoJ) would intervene in the markets, spiking dollar-yen by a couple of hundred points in a matter of minutes, the pair would remain moribund, sometimes moving less than 20 points throughout the global day. Trading dollar-yen was literally like watching paint dry, lulling both long and shorts into a sense of false complacency. Not any more.

This Monday, while most of the currency market remained transfixed by the ongoing developments in Eurozone credit markets, dollar-yen suddenly woke up, racing higher by nearly 100 points in European and North American sessions – its biggest one day gain in weeks. What happened to cause this change? The sudden realisation by the market that the US economic recovery may be stronger than originally thought. Shopping results from retailers showed that Black Friday sales reached a record high this year and the reports on Cyber Monday were equally strong, suggesting that a rebound in consumption could spur US economic growth in the final quarter of this year.

Dollar-yen has always traded as a referendum on the US economy, but over the past year or so flows in the pair have been skewed by the Fed’s quantitative easing (QE) efforts, which have artificially suppressed US bond yields. However, with the Fed unlikely to engage in any further QE efforts in an election year, the pair could go back to trading on economic fundamentals. To that end, the news out of the US, while not exemplary, has been relatively good.

Most importantly, the labour market situation appears to have stabilised with weekly jobless claims consistently below the key 400,000 barrier for the past two months. Today, currency traders will get a clue to Friday’s non-farm payroll report when ADP releases its numbers at 1.15pm. However, the key driver of trade for dollar-yen will be Friday’s job report. If non-farm payroll prints 200,000 new jobs or better dollar-yen could rally towards the psychologically important ¥80 level.