Booking Profit on USD/JPY As It Resumes Uptrend Again After Hawkish Brainard

USD/JPY has been on a bullish trend, as it increased from around 102 to 116 by the end of February, although since the beginning of March this pair has been surging higher, picking up incredible pace.

USD/JPY surged above 125 toward the end of March, but it retreated lower, which we decided to buy. The price fell below the 50 SMA (yellow) for a while, but this moving average was acting as support apart from that occasion.

Eventually, buyers came and it seems like the uptrend has resumed again now. We booked profit on our signal, worth around 140pips. Some of this strength on this pair comes from the USD, but most of it is a result of pronounced weakness in the JPY, which should have benefited in such times as a safe haven asset, but that’s not the case this time.

USD/JPY Daily Chart – The Bullish Momentum Is Back On

Smaller period MAs continue to provide support for the JPY

Comments from the Fed Governor

• Inflation is much too high and subject to upside risks
• The Fed is prepared to take stronger action if inflation and inflation expectations suggest the need
• The combined impact of rate hikes and balance sheet reduction will bring policy to a more-neutral position later this year
• After the policy is more neutral, the extent of additional tightening depends on the evolving outlook
• Fed will tighten ‘methodically’ through a series of rate hikes
• War and Covid lockdowns in China likely to extend supply chain bottlenecks and hurt growth
• I am watching the yield curve and other data for suggests of increased downside risks to the economy
• I am carefully monitoring rotation from demand for goods back to services and whether that occurs without sparking inflation
• Expect balance sheet to shrink significantly faster than the last cycle
• Most low wage workers have seen wage growth that exceeds average inflation

There’s a dichotomy here between ‘stronger action’ and ‘methodically’. The first sounds like 50 bps while the second sounds like steady 25 bps hikes. The stock market has slumped and the US dollar climbed since these comments, with the market more focused on the talk of ‘stronger action.’

I’m not sure that’s the right take but the Nasdaq was vulnerable. Yields in the belly of the US Treasury curve have also risen by a couple of basis points.

ISM March US Non-Manufacturing Report

• US March ISM services index 58.3 points vs 58.4 expected
• February ISM services were 56.4 points
• New orders 60.1 points vs 56.1 prior
• Employment 54.0 points vs 48.5 prior
• Prices paid 83.8 points vs 83.1 prior
• Business activity 55.5 points vs 55.1 prior
• Full report

This is another strong report. The rebound in employment and rise in new orders highlight a strong backdrop in the services sector, which is what you would expect coming out of the pandemic. This was the 22nd month in a row above 50.

Virtually all the comments highlight shortages:

• “Supply chain challenges continue at about the same levels as last month. Employment has improved as COVID-19 cases are declining. Restaurant sales have improved since Valentine’s Day, with mask and vaccine verification mandates being dropped.” [Accommodation & Food Services]
• “Grain and fertilizer prices are near all-time highs, resulting in decreased purchasing.” [Agriculture, Forestry, Fishing & Hunting]
• “Labor and inflation continue to push costs higher across the board for food and food-service supplies.” [Educational Services]
• “Pricing pressures are stronger than ever due to the Russia-Ukraine [war], and energy costs are skyrocketing.” [Construction]
• “Supply chain disruptions are still a problem due to reduced allocations and manufacturer backorders. Demand continues to outpace manufacturing capacity.” [Health Care & Social Assistance]
• “Energy costs are putting a pinch on all suppliers. We have received many surcharge notices.” [Information]
• “Concerns over inflation and rising energy prices are causing our company to take a cautious approach, especially related to planned capital expenditures.” [Management of Companies & Support Services]
• “Long lead times for electronic components are becoming normal and expected. Chemical deliveries are often delayed due to a lack of qualified hazardous materials drivers.” [Public Administration]
• “Global supply chain issues continue to disrupt chip supply, which is suppressing production of new vehicles.” [Retail Trade]
• “We are still seeing raw material subcomponent shortages, transportation delays and price increases.” [Utilities]
• “Constrained supply of many key product groups continues. Inflation worsening. Overall sales and profitability continue to be strong.” [Wholesale Trade]