USD and JPY remaining firm

The USD has rebounded since 19 June in the wake of growing uncertainties and potential disappointment emanating from the EU Summit. As I previously highlighted a rally in the USD was to be expected in the wake of an extension of Operation Twist.

Looking ahead, as Bernanke and Co. also left open the option of more quantitative easing the USD is not out of the woods yet. The USD’s path will not only depend on risk but also on upcoming data releases. A further run of weak data will once again raise the spectre of more QE potentially leading to a softer USD.

Today’s US releases are unlikely to lend support to QE expectations, however. A bounce in May durable goods orders is expected while pending home sales are likely to recoup some of the sharp drop registered in April. However, markets will have to wait until next week for the release of the most important indicator, the June jobs report, before a clearer USD direction emerges.

USD/JPY remains well and truly constrained below the 80.00 level. Elevated risk aversion and a decline in the US yield advantage over Japan are acting as a restraint to any upside move in USD/JPY. Moreover, I do not expect any impact on the JPY from the passage of a bill to raise the consumption tax. Evidence that the Japanese economy is recovering may explain the lack of official enthusiasm to weaken the JPY but this assessment is prone to disappointment.

Increasingly, JPY bears are becoming frustrated by the lack of JPY downside traction. This has been reflected in the turnaround in speculative sentiment which turned positive for the first time in 15 weeks. Going forward, it will be difficult for USD/JPY to rise much unless US yields move higher. Eventually I think this will happen and look for USD/JPY to end the year around 83.00

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