This week has seen a strengthening in USD, but the reasons behind its rally are questionable. There seems to be a correction in the market after a continuous 6-day USD decline until last week. Various factors are influencing the market sentiment. For USDJPY, BOJ Governor Kuroda’s reaffirmation of the easing stance cooled down the YCC revision speculations that were rising in the market. GBPUSD reacted directly to the slower-than-expected growth in June UK consumer price index, which lowered expectations of the terminal rate for the UK policy interest rate. As for EURUSD, the avoidance of clear statements regarding additional rate hikes in September by perceived hawkish policymakers like Knot from the Dutch Central Bank and Weidmann from the Bundesbank also weighed on the euro’s upside.
The main focus for the market in the near future may be USDJPY. One-week volatility in the currency options market has risen sharply to nearly 17%, mainly due to the anticipation of the Bank of Japan’s policy decision next week. Market participants seem to expect more volatility from the BOJ compared to the recent FOMC announcement.
Heading into the weekend, the market is facing a lack of significant catalysts. Only the release of Canadian retail sales for May is scheduled. Financial authorities’ remarks are also being closely monitored ahead of next week’s central bank policy events. In terms of US corporate earnings, American Express is among the companies to be watched closely.
The recent USD rally is likely driven more by buybacks rather than substantial USD buying. However, it’s worth noting that the buyback momentum has been stronger than expected, leading to an extended rise in USDJPY long positions.
If the buyback momentum subsides, we plan to reconsider USD selling opportunities.
