USD/JPY Drops Before FOMC as Taiwan Dollar Surge Lifts Haven Flows

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Taiwan Dollar Surge Sparks Asian Currency Strength

The US dollar faced another bout of selling pressure on Tuesday, with its decline beginning early in the Asian session. A record two-day surge of the Taiwan dollar (TWD) sent USD/TWD down -9.5% between Friday and Monday. This triggered another wave of strength for Asian currencies, with the Japanese yen (JPY) leading the pack. USD/JPY fell by 0.85% on the day to a four-day low.

The surge in the TWD coincided with the conclusion of trade talks between Taiwan and the US, and is uncharacteristic for a currency that is typically tightly managed. With Taiwan a dominant manufacturer of high-end chips and a key supplier to both China and the US, its Asian trading partners will be paying close attention to trade developments and the strength of the Taiwan dollar.

Mar-a-Lago Accord in Play?

A big — if somewhat unpopular — question to me is whether we are seeing the early signs of a currency pact. The ‘Mar-a-Lago Accord’, an economic theory floated early in Trump’s second term, aims to devalue the US dollar to boost American exports. This would require international cooperation, and so far we’ve seen the TWD surge at a record pace, while Beijing appears to be tolerating yuan strength against the dollar — not weakness, as originally feared.

US Dollar Demand Falters as Safe-Haven Status Questioned

Traders have reported a lack of demand for the US dollar, with insurers, exporters, and investors now rushing to sell. A Reuters report aptly dubbed it the ‘Asian Crisis in Reverse’. In a separate article, they also noted that over half of FX strategists now question the US dollar’s safe-haven appeal — a notable rise from the previous month.

It is also worth noting that Beijing appears to be allowing the yuan to strengthen against the US dollar. If that trend persists, it strongly suggests further downside for USD/JPY.

Technical Outlook: USD/TWD and USD/CNH Approach Major Support

• USD/TWD fell -9.2% between Friday and Monday, though support was found at the May 2022 low, prompting a 2.7% rebound on Tuesday.
• USD/CNH is now beneath its 200-day SMA and 200-day EMA, though support has been found around the monthly S1 pivot (7.193) and 7.2 handle
• Which way these currencies trade is likely to have a direct impact on the Australian dollar (AUD/USD) given the yuan’s strong correlation with it

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

While the Australian dollar has risen in line with this week’s bias, it did not treat bulls to a pullback within last week’s range first. AUD/USD bulls are enjoying the dual tailwind of a weaker US dollar and stronger yuan. Still, resistance has been met around 65c, with USD/WD and USD/CNH holding above support, perhaps the Aussie’s rally will remain capped heading into the FOMC meeting.

My assumption for now is the Fed to stand pat on policy and provide no forward guidance, which could throw a level of support under the US dollar and cap AUD/USD gains for now. Overall, my bias remains for AUD/USD to head for 0.6550 and beyond as the year develops.

USD/JPY Technical Analysis: US Dollar vs Japanese Yen

The Japanese yen didn’t quite reach my upper target of 146.35, but it did hit the interim level at 145. Momentum has clearly turned lower on USD/JPY, and with a seemingly complete three-wave correction, a move towards 140 cannot be ruled out. Of course, it’s important to monitor developments in the Chinese yuan and Taiwan dollar for a broader view, but for now, the preference for bears may be to fade into rallies—especially if a break beneath 141.69 brings 140 into focus.

Economic Events in Focus (AEST / GMT+10)

• 08:45 – New Zealand Employment (Q1)
• 09:00 – Australian construction, manufacturing index (Apr)
• 09:00 – RBNZ Governor speaks
• 17:30 - HCOB German and EU Construction PMI (Apr),
• 18:30 – UK S&P Global Construction PMI (Apr)
• 04:00 – Fed Interest Rate Decision, FOMC Statement 
• 04:30 - FOMC Press Conference

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge