You probably already noticed the seemingly empty chart today. That's because we are going to be focusing on fundamentals for USDJPY , and why I am short. To start, it is no longer a question of if, but rather, when, the Fed will be cutting rates for me. This is due to various factors, and we will walk through them:
Firstly, there is a huge miss in Non-Farm Payrolls for May, with the figure coming out a lackluster 75k vs 185k expected. This miss in Non-Farm Payrolls is also paired with slower than expected wage growth, with the figure coming in at 0.2% vs 0.3% expected. These are both reasons why the Fed may now be seeing a reason to cut interest rates, spur investment within the economy, and prevent a slowdown.
Another reason is falling in retail sales and spending. US Retail Sales just came in at 0.5% vs 0.7% expected for May, with the figure being negative in April and February (-0.2%), as well as December (-1.2%). This indicates that despite a lower unemployment rate, spending in households is falling. Longer term, this can be interpreted as a possible fall in GDP in the consumption component, and hence also a fall in the exchange rate of the dollar against major pairs.
The Fed itself is also a factor to consider. Equity markets have been rallying through the pricing in of the possibility of a rate cut this year. This means that if the Fed does not cut rates, it risks disappointing the market, leading to a potential fall or slowdown in this rally. The recent rally, for example, is supported by Powell's assurance that the Fed will "act as appropriate to sustain expansion". This definitely expresses the concern that the Fed is feeling about the seeming slowdown, and also acts as enforcement to the cutting of the rate that is pushing the equity markets upwards.
Finally, the final factor to consider is the ongoing trade war between the US and China. With the state of progress seemingly constantly changing, the one thing that won't change is the fact that a weaker dollar will benefit the US's increasing current account deficit, making its exports seem cheaper while making imports seemingly more expensive. Trump realizes this too, stating on Twitter , "This is because the Euro and other currencies are devalued against the dollar, putting the U.S. at a big disadvantage. The Fed Interest rate way too high added to ridiculous quantitative tightening! They don’t have a clue!"
In short, I am short USDJPY on a long term basis. The reason why JPY is the quote is that JPY has historically been seen as a safe-haven currency, and also that on a technical basis, it has been trading in a tight range recently. This could express market uncertainty, and today's lower than expected retail sales report for May as well as the prospect of a future rate cut could potentially cause a significant breakdown below the . The longer-term timeframe also sees a strong resistance formed since late April downwards (orange).
Regarding take profit and stop losses, the levels displayed on the chart ARE NOT FIXED. The levels will depend on upcoming market reactions to the just released retail sales report, as well as whether rates are cut in June, July, or September. I may also have to adjust the levels if the price continues to range in a slightly ascending fashion, but I will keep you all updated if I do change the levels at all. The reason I am being flexible with these levels is the longer term basis of this trade, allowing lots of time to adjust and react to changing market conditions.
Thanks for reading,
Update on the Fed rate decision happened a few hours ago, and they chose to keep the rate unchanged. However, as I had said in my analysis, the important factor here wasn't whether they would keep the rates or lower them this month, but rather, the words that are used to express potential future cuts. This time around, Powell noted that the case for a cut in rate has "strengthened", and more members of the FOMC have set their targets at a cut for the coming months. As a result, this morning we saw a breakdown through the tight range that USDJPY has been trading in, and as a result, also a large amount of profit for our short position, since the markets are now pricing in a cut for the remainder of 2019.
Regarding take profit and stop loss levels, again these are flexible since this trade is longer term. For now, I am keeping the levels the same, although I may soon adjust my stop loss to break even. This is because I am expecting a longer term continuation downwards, given the fact that the confusion surrounding interest rates have now been cleared, and we can expect a more dovish Fed for the remainder of 2019. Take profit levels will depend on market reaction for the next hours or days to follow, but I will keep everyone updated should I change either of these levels to come.
Thanks for reading!