Oh That Japanese Yen

Another very volatile night in Asian equity markets drove the USD/JPY to fresh session lows of 100.47 after the Nikkei dropped by more than 5%. The topsy-turvy price action in Japanese equities and fixed-income markets drove price action in the pair, which see-sawed from a high of 101.50 to a low of 100.50 as nervous investors bailed on their positions.

Points Of Vulnerability
We have been noting for a while that the Achilles heel of the massive Bank of Japan's (BoJ) quantitative easing (QE) program was the Japanese government bond (JGB) market and, specifically, the long end of the curve.

Unlike the Federal Reserve, the BoJ is struggling with rate repression as the bond market remains volatile. Today's comments by a slew of Japanese officials reflect that concern, and BoJ Governor Haruhiko Kuroda noted that he would like to see lower JGB volatility so as to put downward pressure on long-term yields. Kuroda admitted that yield volatility reduces the impact of the Bank’s monetary easing.

Massive Dampening Effect
Indeed, one of the unintended consequences of the BoJ's easing measures is that mortgage rates may be rising in Japan. If that becomes the new dynamic, it could have a massive dampening effect on growth going forward.

In the meantime, the USD/JPY continues to drift lower toward the key 100 mark. We believe that the support level will likely be tested in the near term.

AUD/USD Sets Up Near-Term Bottom
Elsewhere, the Australian dollar (AUD) staged a strong comeback after building permits and capital expenditure data were received by the markets. Building approvals surged by 9.1% versus 4.0% forecast as Australian housing demand remains robust. The marquee data, however, was the capital expenditure numbers.

The headline number was much worse than expected, at -4.7% in Q1, and the Aussie initially plunged on the news, but the future investments data was pegged at 156 billion, which was larger than the market expected, and AUD/USD rallied once traders had a chance to absorb that news.

Looks Like A Bottom
The AUD/USD appears to have made a near-term bottom around the .9500 level and may now be due for a corrective rally to the upside as short covering and bargain hunting kicks in.

Part of the reason for the currency’s decline has been investor fears about further rate cuts by the Reserve Bank of Australia (RBA). Indeed, issuance of Aussie Uridashi bonds has fallen 71% on a year-over-year basis, but fears may be overblown, especially if capital expenditure figures hold up and the RBA sees no reason to prop up demand in the foreseeable future. If AUD/USD can recapture the .9700 figure, then it may be on its way towards .9900 when short covering kicks in.