Onwards and Upwards for USDJPY

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Market Drivers August 31, 2016

Hamada suggests buying foreign CCY bonds
EUR German employment better
Nikkei 0.97% Dax -0.08%
Oil $46/bbl
Gold $1315/oz.

Europe and Asia:
AUD Private Sector Credit 0.4% vs. 0.4%
EUR GE Retail Sales 1.7% vs. 0.4%
EUR GE Employment -7K vs. -5K eyed
EUR CPI 0.2% vs. 0.3%

North America:
USD ADP 08:15
CAD GDP 08:30
USD Chicago PMI 09:45

The dollar was well bid in Asian session trade but ran into a bit of profit taking when Europe opened for business with cable showing the best performance against the buck after London came back online from yesterday’s bank holiday.

One reason for cable’s bid may have been the 5 point jump in GFK consumer sentiment which improved to -7 from -12 the month prior recovering nearly half its pots Brexit losses. The UK consumer appears to have shrugged off the Brexit woes for the time being and that has put a bid underneath sterling which has remained above the 1.3000 level for the past two weeks.

Meanwhile data from Europe was mixed with German employment a bit better as unemployment roll declined by -7K versus -5K eyed, buy inflation proved softer coming in at 0.2% versus 0.3% forecast. The results had little impact in euro which remained in a tight range around the 1.1150 level.

The big focus of the night was on USDJPY which once again pushed higher hitting 103.34 before finally running into offers. Koichi Hamada, Japanese advisor to PM Abe, noted that BOJ could in principle begin buying foreign currency bonds for its QE program. Such a move would likely be viewed with great concern by other members of G-7 as it would imply a de facto intervention. Yet the fact that Mr. Hamada even mentioned the possibility of such action shows just how desperate Japanese officials are to lower the exchange rate of the yen.

To that end today’s ADP data could be a key mover for the market. If the numbers come in anywhere near the 175K forecast, the upside pressure on USD/JPY will increase markedly as currency traders will begin to seriously consider the prospect on a September hike. If employment data proves to be supportive the Fed could decide to move on rates sooner rather than later which would then buy it time to see how the economy reacts to a modest bit of tightening. In the meantime USD/JPY could test 103.50 as the day progresses.

Boris Schlossberg
Managing Director

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