JPY’s rally still has legs

The Japanese has been rally strongly over the last two weeks as investors continued to discount the Fed’s hawkish stance. USD/JPY broke the 111 support (psychological level and Fibonacci 61.8% on June-July rally) to the downside. The road is now wide open for further decline with the 109 threshold as first target.

The Federal Reserve will wrap up its July meeting on Wednesday with only an updated statement. We will have to wait the September meeting to get new economic forecast and a press conference. Therefore, it will likely be a non-event as Janet Yellen will surely seize the opportunity to play for time, rather than rushing to tighten monetary policy. Yet, the clock is ticking and postponing further the timeframe would send a negative signal to investors. The September meeting will therefore be the next key event.

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In anticipation of this meeting, the market will monitor closely economic data from the US. A reversal in the negative trend of the last few months will quickly trigger into a re-pricing of a solid tightening pace, which would translate into a higher yields and stronger dollar. In the meantime, even though we think that the dollar’s debasement has reached its limit against several of its peers, the Japanese yen still has room to appreciate, thanks to its safe-haven status.

US: demand for housing keeps increasing

The US real estate market keeps on growing very significantly. One key indicator of the US economy, existing homes sales keep increasing and are now at 2007 level. Today will be released June data and should remain around May levels at all time high! The million dollar question is now to know whether the US real estate market is in a bubble and when it is going to burst. Like the US stock markets, real estate market has been largely underpinned by free money provided by the Fed over the last decade.

On top of that, house prices levels are above the 2007 level. There is no evidence at the moment that we reached an inflection point and we may see higher prices. Yet, we already heard concern about asset valuation from the Fed regarding… stocks. Nonetheless, the “surprising” recent dovish comment from Yellen paves the way for more patience. In particular, the US debt level is way too high and inflation way too low to increase rates. But markets do not seem to worry about those levels.

We remain bullish on the EURUSD at least until September. Markets estimate that the ECB will hint at further tightening and will follow the Fed path. In our view, there is some room for more EURUSD dollar increase.

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