USD/JPY Tumbles after U.S. Equities Give Back Gains
The U.S. Dollar surged to a three-month high against the Japanese Yen on Monday in reaction to the overwhelming election victory by Japan’s ruling party. Investors were betting that this would lead to a continuation of “Abenomics”, or the ultra-easy monetary policies that have kept downward pressure on the yen.
Essentially, the price action was driven by the divergence between U.S. Federal Reserve monetary policy and the Bank of Japan’s monetary policy. The Fed is tightening and the BOJ is implementing a loose policy. This is helping to drive up U.S. Treasury yields at a time when the BOJ is trying to hold rates steady at or below zero percent. The widening of the interest rate differential between U.S. Government Bonds and Japanese Government Bonds is making the U.S. Dollar a more attractive investment.
Late in the session, the USD/JPY tumbled from its high to close lower. This move was fueled by profit-taking and a reversal of the carry-trade. U.S. equity markets also reversed down to close lower, forcing investors to sell dollars and buy yen in order to pay back loans from Japanese banks.
The September U.S. Dollar Index was also supported by a weaker Euro, which represents about 57 percent of the index. Investor uncertainty and position-squaring ahead of the European Central Bank’s meeting on Thursday, October 26 influenced the price action. Traders are betting on a more hawkish stance from the ECB offset by hints it is not in a rush to tighten policy.
In other news, speculators pared net bearish bets on the U.S. Dollar to their lowest level in more than a month, according to data released on Friday by the Commodity Futures Trading Commission.
U.S. Economic News
There were no major economic releases on Monday, but investors continue to watch for developments over U.S. tax reform and President Trump’s selection for Fed Chair.
Trump said on Monday he is “very, very close” to making his decision on who should chair the Fed and was considering at least three people: Federal Reserve Governor Jerome Powell, Stanford University economist John Taylor and current Fed Chair Janet Yellen.
Gold
Gold prices reversed to close slightly higher on Monday after early session weakness drove the market into its lowest level since October 6. Initially, the market was under pressure due to rising Treasury yields, a firmer U.S. Dollar and increased appetite for risk.
A sharp break in U.S. equity markets late in the session sent investors into the safety of gold. Oversold technical factors also factored into the short-covering rally.
Crude Oil
U.S. West Texas Intermediate and international-benchmark Brent crude oil finished mixed on Monday with WTI closing marginally higher and Brent ending the session lower.
The markets were generally supported by a drop in the U.S. rig count and concerns over Middle East supply. Increased imports from India also contributed to the early strength. Prices fell late in the session after some analysts warned that the United States market may not be tightening by as much as expected.
This article was originally posted on FX Empire
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