Updated: Mar 28, 2021
The United States has had a turbulent year, most recently in the news President Trump was under a lot of heat with the Capitol controversy which has now led to another impeachment! The upcoming year now will see the new president Biden lead the country but with what policies and how will this impact the dollar?
The US lawmakers agreed on a "$900bn package" to help support the economy during the pandemic. This type of fiscal and monetary stimulus of printing money, lowering interest rates and reducing specific taxes all help sponge the damage to come giving the people more money to spend. However, with all this support generally comes with an impact on the US dollar value.
High Level Fundamental Summary
Overall, the fundamentals are at a tipping point with most indicators signalling a potentially reversal but the sentiment side not currently looking like it's agreeing. Ideally, we'd like to see the hedge fund positioning start to increase for USD longs and JPY shorts this could indicate that hedge funds have a similar outlook and we're not trading against big money.
Macro Currency Strength Meter - Logikfx
The macro currency strength meter is looking interesting. We're at a pivotal point which could see future trends see USD value increasing and JPY value dropping. Since the start of January the USD macro score has been rising showing a potential strength coming in on the USD. On the flipside JPY has been doing the opposite which is why the USDJPY LONG potential could be a future reversal idea!
So... with that being said lets take a look at the rest of the fundamentals to see what we can spot!
GDP Growth Rate Differentials
The GDP Differentials have new forecasts for 2022, most countries looking to have recovered from the pandemic and hitting positive growth rates. On the bright side the US is looking like it's growing more than Japan for 2022 which is bullish for USD and bearish for JPY relatively.
USDJPY vs Exxon Mobil
Overall our import export analysis was showing that it's not looking great for a USDJPY just yet. Exxon Mobil one of the US's biggest oil companies has a slightly negative correlation with USDJPY. The growth recent the past few months has been quite substantial with over 40% increase which is way over the expected average growth per month. We're looking at 3 time standard deviation! Not great so potential further downwards pressure is expected until we see Exxon prices slump.
USDJPY vs WTI
The same situation applies to the crude oil prices itself with prices now nearly reaching pre-pandemic levels with a -70% correlation we'll be expecting further downward pressure on USDJPY. Since last month there's been over a 10% growth in oil itself! It looks like global stimulus is taking effect and companies are recovering slightly, it's also slightly expected during the winter season as more utilities are being used to heat houses and buildings.
So far though 2/3 exports are saying it's not ready and that's why our import export analysis is currently red!
USDJPY vs Toyota
Toyota on the other hand is one of Japans top car exporters with countries across the world who buy their cars and vehicles. At one point in time it was valued the top car manufacturer in the world! It has an 83% correlation with USDJPY price data over the past 10 years and it too showed negative returns in the past month which means import and exports analysis are not yet aligned!
USDJPY vs Interest Rate Differentials
Nothing much to say here. Central banks have been pretty stagnant on their interest rates view and potential changes are hard to justify with already ultra low interest rates. The only option here is negative interest rates which will be highly scrutinized by most domestic consumers as no one wants to put money in a bank that isn't going to gain anything right?
Domestic Stock Market Performance
On the flip side the domestic stock market performance has been huge. It's already reached pre pandemic levels and even higher! To be precise 10% higher which is bullish on USDJPY, this is because US pensions and wealth is now starting to look more valuable in comparison to other countries and specifically Japan! Investors will now see to buy USDJPY to protect against inflation on their S&P500 assets.
Commitment of Traders Report - COT Net Open Interest Positioning
Overall, the sentiment of the market is not agreeing with our idea. It might be a good idea to wait a week to catch up on the next weeks positioning to see if the pink line hedge funds go positive for USD and negative for JPY. Any early signs of the open interest heading in that direction will also be useful information!
Weekly price levels have started to hit interesting purchasing points seen in the past. Considering USDJPY has been down trending for a year we can expect a potential reversal soon and this area seems to be a high likelihood.
Our plan now is to keep an eye on the fundamentals to get increased confidence but also COT as this will make sure we're not trading against the market.
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