Forex trading will really heat up this week as a late Non Farm Payrolls release has set up an action packed schedule for economic releases. In addition to the NFP data on Friday, we will also get employment figures from Canada and Australia. These data points combined with Interest Rate Meetings from the U.K., EU, Australia, and New Zealand should keep things exciting for the near term.
Of all the Forex pairs that we are watching, the USDJPY (FXY) looks the most interesting. If you were to run a Chart of the Day this chart would definitely be worthy for the coming week.
(Click to enlarge)
This graph shows the tremendous run up in the USDJPY since last month's Non Farm Payrolls figures blew away expectations. The five figure move is huge considering both the USD and JPY are safe haven currencies and are often closely correlated.
Japanese Exporters Selling Yen
Helping to trigger the huge move in the USDJPY were Japanese GDP figures that were released just after the NFP data and showed the country was contracting (more on the BoJ's reaction). This resulted in a double whammy of exodus from Forex traders from the yen towards the dollar. But, the real move, and why the momentum continues is due to a rotation out of the yen from Japanese exporters. To understand this, one has to understand why the Japanese yen is called a safe haven at all. On the surface it is odd that the two leading currencies that receive the "Safe Haven" status are the U.S. dollar and Japanese yen. This will often cause some strange headlines such as "dollar strengthens as risk selling hits the financial markets following record losses from U.S. banks; U.S. economy in danger of recession." Or in a similar vein, the yen is often seen rising following negative Japanese economic news that sends the Nikkei lower.
The answer is that as the reserve currency of the world, the dollar sees demand when Forex traders are exiting the rest of their positions. Also, and this was very important during the financial crisis of 2007-09, if you were a big foreign bank and needed to park a few billion dollars somewhere for the short term, the best options are in the U.S. This is the reason that the biggest U.S. Money Market funds saw their holdings explode with foreigners funds.
In the case of the yen, safe haven buying is related to Japan exporters. When risk is rising in the rest of the world, exporters will repatriate their foreign investments back into yen. On the other hand, as the rest of the world experiences growth, these multi-national firms will spend more money out of Japan promoting and manufacturing their end products.
As such, the current environment of U.S. expansion versus Japanese contraction has triggered Japan's exporters to buy dollar's and other major currencies, to fund their foreign based sales growth.
Back to the NFP
Therefore, the result of this week's coming Non Farm Payrolls should have the power to either pop the current momentum or fuel another month's move higher. This is especially so as last month's positive NFP surprise followed a worse than expected ADP Employment reading and a stabilization to the fall of Initial Claims data. As such, as good as the Non Farm results were last month, Forex traders may look at them as an apparition if they fail to show much follow up growth this week. In such a scenario we could easily see the demand for the USDJPY dry up and quickly see the pair below 80.00 again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.