USD/JPY Hits 5 Year High, AUD/JPY 15 Year High (page 1 of 2)

DailyFX Fundamentals 06-13-07

By Kathy Lien, Chief Strategist of DailyFX.com

Dow Jumps 187 Points, Leading to Strong Gains in Carry Trades

The biggest story of the day is the rally in US stocks and given our extensive coverage about the correlation between carry trades and the Dow, it is not surprising that currencies pairs like AUD/JPY, GBP/JPY and EUR/JPY all rose in lockstep with US stocks, which did not begin to take off until the release of the Beige Book report. As the last event risk of an otherwise busy trading day, the slightly more optimistic conditions in the various Fed districts were enough to take the Dow higher. Our friends at IFR Markets made a very interesting point. They said that in "today's Beige Book, words with the root weak appeared 38 times compared to 63 (65% more) occurrences of strong. This compares to the prior month, where weak appeared 48 times while strong appeared 66." The rally in the Yen crosses was so strong today that the US dollar hit a 4 year high against the Japanese Yen while the Australian dollar rose to a new 15 year high. The Bank of Japan will be starting its 2 day monetary policy meeting this evening. Even though interest rates are not expected to be changed, there is a minority looking for one. Interestingly enough, the current surplus increased in the month of April while the trade surplus decreased. The divergence between the two numbers is a reflection of increased foreign investment into Japan and the weakness of the Japanese Yen most likely contributed to the overall demand. The strength of today's move suggests that there is a decent chance that carry trades will continue to rally. As for the bill introduced by the Senate today, although it is new, it contained no major threats. It only removed the requirement that the Treasury label a country a currency manipulator before the administration can take action.

US Dollar Shrugs Off Stronger Data, Volatility Continues to Remain Low

With so much economic data released out of the US today, the hope was high for some meaningful activity in the US dollar. Unfortunately that did not happen despite solid retail sales, import prices and business inventories. Why? Because the voracious appetite of US consumers and the higher inflationary pressures do nothing more than validate the Federal Reserve's plans to keep interest rates unchanged. The interest rate curve is now pricing in a greater chance of a rate hike over a rate cut, but with growth only beginning to improve, it is far too early for the central bank to actually consider lifting rates especially since high bond yields are still a problem that the economy faces. RealtyTrac Inc recently announced that foreclosures increased 90 percent in the month of May which indicates that even though the stock market is continuing to rise there is a part of the country that faces very serious economic problems. Yet this should not undermine the fact that consumer spending was very hot in the month of May. Not only did headline retail sales double expectations and sales excluding autos increase by 1.3 percent, but stripping out the record gasoline prices, we still saw a 1.2 percent rise in spending. The strength of the labor market is clearly is helping to fuel spending because as long as people have jobs, paying their rent or mortgages will be their number one priority. Meanwhile both the Treasury Report on Currency Manipulation and the Beige Book triggered lame reactions in the currency market. There were no major surprises in the Beige Book and as we expected, the recent policy changes by China saved them from being branded a currency manipulator.