Despite relative calm in the foreign exchange market at the beginning of this post-holiday week, the market will be closely watching persistent dollar weakness, in particular the key 111.0 support level in the relationship between the U.S. dollar and the Japanese yen.
Some equity traders pay close attention to the dollar/yen exchange rate, as it often can be an early tell as to where U.S. stocks are heading and a gauge of risk appetite in the market.
USD/JPY vs. S&P 500
The U.S. dollar/Japanese yen appeared to stabilize toward the end of last week's trade as the pair held support ahead of the 111.0 figure. However, any rebound quickly fizzled in early Asia trading as the pair failed to hold above 111.50 and earlier found itself within arm's length of the 111.0 barrier.
Finally, in Monday's trade, it fell below the 111.0 mark briefly before rebounding ever so slightly.
The weakness in price action is a bad sign for dollar bulls, suggesting that the greenback's sell-off may not be over. This comes as skepticism surrounding the Federal Reserve's actions in 2018 continues to dominate flows in the market.
As many analysts have noted, inflation — or lack thereof — is the central fundamental variable at play in dollar trade going forward.
With inflation data still very much subdued, traders see no reason that the Fed will raise rates next year at the triple-rate-hike pace seen this year. Looking ahead, that growing doubt continues to weigh on the dollar trade.