The exchange rate that often displays the greatest sensitivity to US economic developments is the dollar/Japanese yen (USD/JPY).
So it may be seen as a risky idea to take a fresh position in USD/JPY ahead of the Federal Reserve’s monetary policy decision on Wednesday and the US non-farm payrolls data on Friday.
Yes, the Fed is expected to stand pat but its accompanying commentary can move markets.
Meanwhile, waning risk aversion in markets has weakened the yen of late and pushed USD/JPY to five-week highs.
Still, the forex team at RBC Capital Markets has taken a bet that the yen will rally in coming sessions, establishing a short USD/JPY position at ¥112.07 with a target of ¥110.00 and a stop loss at ¥113.20.
“US data surprises have flipped from positive to negative on our Economic Surprise Indices and . . . the final leg higher in risk appetite this week does not look very well founded,” said RBC in their latest Thematic Trade of the Week note to clients.
“Real money capital flows have remained JPY-positive in recent weeks and the bounce in USD/JPY from the low around 108 again appears to be led by speculative positioning,” the bank adds.
RBC also notes that the yen tends to strengthen during Japan’s Golden Week holiday in early May. “USD/JPY has fallen during Golden Week on 11 of 17 occasions since 2000 and the average fall (0.5 per cent) is statistically significantly different to the average weekly change in all weeks.”