Is EUR 1.05 And JPY 110 Next?

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It’s a new trading week and the U.S. dollar has hit fresh multi-month highs against the euro, Japanese yen, Swiss franc and Canadian dollar. Rather than fading, the momentum continued with the greenback also trading higher versus sterling and the New Zealand dollar. The only currency that outperformed was AUD, which is holding up well ahead of the Reserve Bank of Australia’s meeting minutes. While we may not have expected the mighty buck to crash and burn and was looking forward to further strength ahead of Yellen’s testimony on the economy, we did not think that it would happen so quickly before a deeper pullback. Given recent volatility in the foreign-exchange market and the extended moves in currencies, the risk of a correction grows with each pip of continuation. But as long investors are dumping U.S. bonds, there may not be a meaningful correction for the greenback. Ten-year Treasury yields rose as high as 2.3% intraday, the best level this year. The two-year yields breached 1%. They have since settled off their highs but the yield spread between the dollar, euro, sterling and other major currencies continued to move in favor of the greenback.

Although Japanese GDP growth more than doubled, expectations in the third quarter, USD/JPY rose as high as 108. The rally may have stopped right below the 50- and 100-period SMA cross on the weekly chart (see below), but the pair’s uptrend is far from over. Trump’s victory was a game changer for the dollar and stocks. These fundamental forces have not run their course and for this reason, the dollar’s rally isn’t over. Hitting 110 is not only possible but likely for USD/JPY but rather than chase the move, it may be smarter to wait for a pullback toward 107. U.S. retail sales are scheduled for release Tuesday and it’s a tough call because while wages are on the rise, confidence has been low, employment growth slow and gas prices have fallen.


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