SYNERGY FX ALERT BY TODD DEITERICH | 29.05.15

CAN THE BOJ RESTRAIN THE USD/JPY RALLY?

In the midst of the growing uncertainty about when the FED will lift rates and whether Greece will default and leave the EMU, the USD/JPY posted a 12 year high at 124.45 during the NY session yesterday. The technical picture points to higher prices with 125.00 being the next round number target. However, what fundamental policy tools can the Bank of Japan execute if the move really accelerates higher? Under normal circumstances, when a currency loses value quickly, the Central Bank will raise short-term interest rates, intervene in the FX market by purchasing its currency outright and begin selling foreign assets to shore up the balance sheet back home. The BoJ can't do any of these to stop a sudden plunge in the ¥en. The BoJ can't raise its benchmark interest rates because it owns most of the outstanding JGBs and a rise in yield of even 1.5% could bankrupt the entire nation. It can't sell its foreign currency reserves for ¥en because that would be an instant reversal of its longstanding QE policy and the bank would just be buying back ¥en it dumped into the market in the first place. No. The only real option the BoJ has to stem the weakening trend of the ¥en is to complaint about it and try to jawbone the pace of decline. It's no secret that the cornerstone of Abenomics calls for a weaker ¥en. But as complaints from importers, consumers and energy users grows louder, we expect the timely comment from a BoJ official to call for an orderly market as the pair trends up to 130.00 The first round of jawboning happened yesterday shortly after the USD/JPY hit 124.45 which took the pair back to 123.60. Since then, the USD/JPY has traded in a narrow range between 123.60 and 123.90 (see chart) The key data point today is the revision of Q1 US GDP. The preliminary forecast is for a drop of .8%. Considering that this data is 60 days old and Q1 GDP weakness has been addressed by every voting member of the FOMC, Synergy FX considers the risk to be a consensus or better reading. This could be bullish for the USD in general since next week is full of forward looking data and the May Non-farm payroll report. As such, we suggest short-term traders can look to buy USD/JPY up to 123.70 with an initial target of 124.85 and a 122.90 stop. The EUR/USD hit our initial support target of 1.0860 without any follow through on a closing basis. Conflicting stories out of the Greek negotiations has kept trade choppy. Synergy FX suggests medium term traders can re-enter short positions in the 1.0950 to 1.0970 area and be prepared to hold over the weekend for a move below 1.0820 next week.

The AUD/USD fell sharply after Thursday's CAPEX data printed twice as bad as expected. We don't expect the RBA to lower rates next week but we do expect the bank to maintain its easing bias. We calculate .7715 as solid resistance and target the .7575 level next week. The GBP/USD hit our downside target of 1.5340 from Monday's report so we are currently flat the Sterling and looking for another signal. Medium term traders can look to play a GBP bounce by selling the EUR/GBP at .7170 for a move back to .7060 with a .7235 stop. SYNERGY FX