With the popular long USDJPY trade now stalled for the time being, some traders and investors may be tempted to pile back into gold, which is a strategy that has famously backfired in the past.
The US dollar (USD) is trading lower against the euro (EUR), British pound (GBP), and the Japanese yen (JPY) on the back of weaker-than-expected first-quarter GDP numbers. Growth in the first three months of the year accelerated to 2.5% from 0.4% in Q4, but economists were looking for GDP to reach 3%.
On a day when USDJPY was already pressured by weaker Japanese CPI and division within the Bank of Japan (BoJ), disappointing US data only compounded the pain for the pair. With no catalysts to support USDJPY in the very near term, the currency pair is poised for a test of 98, and if this level is broken, 96 will become support.
US first-quarter GDP growth really wasn't all that bad. Personal consumption jumped 3.2%, reaching its strongest level since in Q4 2010, while private investment rose 12.3% on higher residential investment. Exports and imports also increased, but fixed investments plunged. The Federal Reserve, which is meeting next week, will be relieved to see a pickup in consumption, but nonetheless, the disappointment, which was the largest since 2011, will still give FX traders another reason to sell USDJPY.
All of the Japanese yen crosses are on the move today, with USDJPY, EURJPY, CADJPY, and AUDJPY all down more than 1%. The Bank of Japan did not announce any new monetary easing measures last night, which wasn't a surprise, but investors were still disappointed because policymakers can't agree on whether 2% inflation can be achieved in two years.
According to the median forecasts, CPI is expected to hit 1.9% in March 2016, which is three years away instead of two. Going into last night's event risks, we said that the sooner the BoJ expects to reach the goal, the more positive it would be for USDJPY. Unfortunately, the BoJ now expects this target to be reached at the end of three years, which is longer than the initial pledge.
In other words, the Bank just started easing aggressively and has already been resigned to failure. The range of forecasts is huge as well, with some members looking for CPI to be at 0.8% and others at 2.3%, which implies that there is a huge amount of division within the central bank.
Risky Gold Trade May See Resurgence
With BoJ officials skeptical about their own ability to boost inflation to 2%, it is no surprise to see USDJPY under pressure. For the time being, this should be a near-term top in USDJPY. We have seen zero evidence of Japanese investors raising their foreign-bond exposure, and until all of the investment plans by Japanese insurers are put into action and more diversification results—which will happen—there's no reason for FX traders to jump back into the short yen trade.