Another look at the USDJPY head and shoulders as we head into US employment data today. Trying to game the reactions is difficult in many USD pairs. It’s soon time for USDJPY to pick a direction.
Trying to guess the actual number we will see with today’s US employment report is only half of the problem. Please see Macro Mads’ run-through of today’s US payroll expectations. The other half is determining how the market will react as we all know it’s not about the simple equation of good data = good for currency, it’s also about central bank QE expectations and their interaction, in turn, with the entire risk on/risk off equation. Suffice it to say that it’s easy to quickly tie oneself into knots with the various scenarios.
So I will try to keep it simple and then see how the price action supports or falsifies my view. For USDJPY, my baseline expectation is that a number inline or better than expectations may be positive for USDJPY, even if it isn’t necessarily good for the USD elsewhere (at least, not versus the more pro-risk currencies like AUD, NZD, etc…). On the latter subject (whether the USD can do well across the board on good US data) the question is how much of the market’s recent positive risk appetite is merely in anticipation of QE gravy rather than on resilient growth expectations. If too many eggs have been placed in the QE basket, then the USD will generally more broadly strong on strong employment numbers, not just in USDJPY.
If the US data is particularly bad, it might still be generally USD positive on the usual negative carry trade (risk off) reaction, but USDJPY might actually head south in this case as bonds would likely spike higher, as the JPY tends to do even better than the USD when we have a strong risk off/lower yields situation. Stay tuned.
Chart: USDJPY
See below the USDJPY upside down head and shoulders formation, with the right shoulder not quite yet formed and the blue line indicating the neckline. To the downside, we quickly run into the ascending trend-line.
John J Hardy,
SAXO BANK