Lack of central bank guidance leads to reserve currency volatility
Mixed start to the week and month.
USD based equities
After the US Dollar suffered continued declines for almost the entire month of July, August begins with bullish corrections of the US currency across the board.
This time it is not about flows seeking refuge in the Dollar. The stock markets remain in positive territory after the economic PMI figures published today continue to show signs of recovery in manufacturing activity, with 51.8 in July for the European Union and 54.2 in the case of the United States.
In both cases, the economic indicator points to an expansionary activity that, although not sufficient for economic recovery, would need to be supported by the increase in domestic demand. It is a sign that the reopening has put the productive activity into operation.
Nor can this movement in the Dollar be attributed to spikes in interest rates. The yield of the 10-year American bond, TNOTE10, although it has risen three basis points to 0.56, remains at minimum levels below 0.60 and will hardly be able to go above this area as long as the Federal Reserve maintains its ultra-expansive policy as Jerome Powell stated with determination in his statement from the last Fed meeting.
The bullish correction of the Dollar is, therefore, a purely technical movement after the bearish movement continued for an extended period that has led to oversold levels.
According to the investment banks and market analysts, the downward trend of the Dollar will continue over time as long as current market conditions are maintained, something that seems entirely plausible.
USD vs. JPY
This continuous fall in the Dollar, however, can cause inevitable friction with the interests of other currencies. This is the case of USD/JPY.
The Japanese finance ministry, which is in charge of setting the exchange rate policy through the Bank of Japan, will not be comfortable with a Yen continuously strengthening against the Dollar. The record of Bank of Japan's interventions in the market to avoid strengthening its currency is long.
As the pair approaches the 100 zone, the probability of an intervention is higher. Although they have not made it public, the movement that occurred at the end of last Friday is very likely to be an intervention.
USD/JPY reached the 104.20 zone to recover 200 pips in a matter of a few hours, up to the 106.30 zone, the technical level through which the SMA line runs for 100 periods on the 4-hour chart. This type of intervention by the BOJ is very characteristic with a highly technical component that takes advantage of oversold levels and moments of low liquidity in the market.
Therefore, it is foreseeable that the market will continue its downward pressure in USD/JPY with targets below the last lows at 104.20, although we cannot rule out movements like the past if the BOJ returns to the market.
This means that volatility will increase in this pair. Still, if the Dollar weakness continues, as most analysts expect, the BOJ will be able to do little or nothing to prevent the pair from falling below 100 soon, unless they don't mind being classified by the American Treasury as currency manipulators.
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