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USD rally remains intact - BTMU

FXStreet (Barcelona) - Derek Halpenny, European Head of Currency Strategy at the Bank of Tokyo Mitsubishi UFJ, observes the continuation of the bid tone around the greenback.

Key Quotes

"We’ve had a notable bounce today in USD/JPY to close to the 105.00 level – the highest level now since January of this year. Of course in the week when we have some key US economic data, we can perhaps safely assume that there is some speculative buying ahead of the prospect of more data confirming a strong US labour market. The US-Japan 2-year swap spread has been trading over 50bps for the longest period (covering July-Aug) since early 2011."

"While the rates spread correlation has been tenuous of late, a look at the cross-border flow data does suggest that the retail sector may slowly be waking up to this attractive and widening yield pick-up in what is Japan’s favourite destination historically – the US. Japanese investor buying of foreign bonds totalled JPY 1,045.6bn in July – and that in a month when the most active market participant – Japanese banks – were net sellers, an usual development in itself."

"What stands out as notable are two specific flows. One mentioned here recently was the foreign bond buying by Japanese life insurance companies totalling JPY 974.1bn, which was the largest total since August 2010. The second was the buying by Financial Instrument Firms, which totalled JPY 1,197.2bn, which is in fact the largest buying on record for that entity going back to the start of the data in January 2005."

"While Investment Trust Companies were a small net seller, Financial Instruments Firms are also used by the retail sector in Japan. The Investment Trust of Japan data showed a 3.2% jump in US dollar denominated investments in July, the largest since October 2013."

"This data suggests at least some real money impetus to this latest bounce. The surge in cash earnings growth in data released today (2.6% in Jul from 1.0% in Jun) also reinforces the retail investor outflow story. The wage growth rate was the largest since January
1997."

"Bloomberg is citing speculation on GPIF reform as a factor explaining yen selling today with a pro-reform LDP member about to be appointed health minister, which includes the remit of managing the reform of GPIF. However, it is the underlying favourable dollar conditions at play here and the subtle shift in Fed bias ahead of key data which is the real driver of this move, and hence should prove sustainable."

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