Europe and Asia
GBP: UK CPI 3.0% vs. 2.6%
GBP: UK PPI 0.7% vs. 0.7%
USD/JPY crashed through the 108.00 level in late Asian and early European trade, wiping out stops along the way until it finally came to some support ahead of the 107.50 level. It’s hard to pinpoint the exact cause of the move, which appears to have been driven by a combination of stop running, risk aversion flows and some market uncertainty about Governor Kuroda’s reappointment.
Earlier in the day, Japanese PM Abe stated that he has yet to decide on the reappointment of Mr. Kuroda and that lack of confidence along with a turn in the Nikkei could have contributed to the fall in USD/JPY that dragged the pair to fresh six month lows.
Mr, Kuroda is the principal architect of Japan’s reflation policy and is widely respected by market participants. The market is pricing in an 80%-90% chance of a Kuroda reappointment so any hesitation or change of heart by Mr. Abe is sure to cause further turmoil in USD/JPY.
Mr. Abe is playing a very dangerous game as Japanese officials once again find themselves with a strengthening currency that could hurt export earnings which are so vital to the country’s economy. Already officials are making murmurs about watching the “speculative moves in the pair.” If risk aversion flows accelerate the move lower, USD/JPY could quickly fall towards the 106.00 figure and most of the Japanese exporters who have budgeted a 110.0 exchange rate for the year will see their margins squeezed.
For now all eyes with be on the 107.31 lows set in September of 2017 and if US equities begin to sell off in North American trade the shorts are sure to test that level.
Elsewhere, UK inflation data came in slightly hotter than expected at 3.0% vs. 2.9% on CPI basis. Overall, however, the report was a non-event as prices declined in motor fuels but increased for cultural events generally offsetting costs for the consumer. This Friday’s UK Retail Sales will be of much greater import to the market as it will show the state of final demand in UK. Lately, that reading has been soft and any downward surprise would put in doubt BOE’s hawkish stance towards rates.
In North America, the calendar is once again barren, with the focus squarely on equity flows. If we once again see Turnaround Tuesday, with equities giving up the gains from yesterday’s rally, the run on USD/JPY will resume with the 107.00 figure becoming a key focus as the day proceeds. On the other hand, if equities could hold their gains, USD/JPY could quickly reverse the move and squeeze the trapped shorts at these levels as it remains grossly oversold on the day.
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