USD/JPY finally breached the 100.0 mark at the 3rd time of asking. However this attempt at breaking higher has little to do with Japan’s fundamentals or any Bank of Japan actions. In fact, USD/JPY rallied not on JPY weakness, but rather on USD strength. Looking across all major currencies, with the 3 risk currencies EUR, GBP and AUD going sharply lower, in opposite direction with USD/JPY, rather than in tandem. US stock prices were also heading higher during early trading session, hence it is clear that the move in risk currencies is not caused by a decline in risk appetite, alluding to an increase in strength by USD.
Why is the USD getting stronger then? Previously we’ve discussed some possible reasons for this new phenomenal. But whether you agree with the arguments that were put forward, one will have to agree that USD strength is tied strongly to US stocks right now. Yesterday’s Initial Jobless Claims was the catalyst that sparked a new rally in US stocks, with number of people applying for benefits coming in less than expected. Number of people still on continuing claims also fell more than expected, standing at just over 3 million, a decline of 27K. Some may think that these numbers may not accurately reflect the current job market conditions given its high volatility week to week. Nonetheless, given current bullish optimism, overreaction to positive news is not surprising as traders will find every single reason to buy.
After price manage to push above Monday’s high, bulls received renewed vigor to climb higher as technical traders flooded in, seeking the 100.0 hallowed ground. Once 100.0 was breached, the breakout continued with price finding some support around 100.5 even though US stocks started to retreat and entered into red territory. The decline in USD is observable once again in EUR, GBP and AUD with prices rebounding higher after the sell off at around 2pm EDT. However, the same pullback did not happen in USD/JPY, suggesting that despite being a main beneficiary of the USD/Stock correlation, USD/JPY is now running on its on now.
The question that we asked before price hit 100.0 was whether hitting the aforementioned level would result in stronger bullish resolve or bring out a full bearish reversal after the bulls are satisfied in hitting the mythical triple digits – ala WTI crude back in 2007 and the 100.0 USD per barrel incident. Given latest information, the scale seem to favor a scenario where stronger bullish momentum may actually come out of it. With today being the last trading day of the week, conservative traders may wish to wait for next week before making hasty judgement as liquidity tends to be slightly lower on Fridays, which may exaggerate underlying bullish momentum. Caution is advised.
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