It has been a relatively quiet few sessions in the foreign exchange market following the release of the weaker-than-expected non-farm payrolls out of the US. For example, the most important currency pair in the world, euro / dollar, has been pinned to the 1.14 level with little appetite to move either significantly higher or lower for now. Most of the action since the employment report was released has been in dollar / yen, with a rally from about 106.50 all the way up to 109.30 and then some retracement of this today to around 108.70.
The main reason for the drop in the yen was statements by Japanese officials such as the Finance Minister that the country was ready to intervene in the case of one-sided movements in the Japanese currency. What one-sided means exactly is open to interpretation of course and the Japanese will naturally not reveal which exact levels are going to cause a reaction. Certainly a breach of the 105 level for dollar / yen might serve as an “intervention alert” level (105.53 was the 18-month low for the pair on May 3rd) but it is more likely that under 100 is the candidate for actual intervention to take place. Another adviser to the Prime Minister said that the 90-95 level was the likely intervention trigger, which only served to muddy the waters with respect to guessing the key levels. The main takeaway though is that dollar / yen is near the pain threshold for the Japanese and somewhere in the 90-105 range the Bank of Japan is probably lurking – even though such a move could have limited effectiveness unless the other G7 countries are on board.
Concerning the US dollar, it seems that the weaker-than-expected employment report has all but ruled out a June rate hike – particularly with the UK vote on EU membership pending a few days after the meeting. Fed speakers have not sounded too thrilled about hiking rates soon, so the prevailing view in the markets is to quickly take profits on any dollar rallies. This behavior was clearly on display this week when the dollar rallied versus the yen, but once it climbed above 109, the temptation to take profits proved too great. It’s worth noting that for the dollar’s rally against the yen to become more respected, the pair has to climb above 110 and specifically to challenge the 50-day moving average at 110.33 and then the 200-day which is further away at 117.36.
In conclusion, these are the main factors that have led to some directionless trading in the key pairs of dollar / yen and euro / dollar and why the recent ranges look like holding for now. The flurry of key central bank meetings in June as well as the UK referendum could lead to some more excitement and possible breakouts, unless there are other triggers such as China or the energy / commodity complex that create higher volatility before that.
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