Market Drivers June 1, 2016

Abe delays tax hike USDJPY drops through 110.00
EZ PMI in line
Nikkei -1.62% Dax 0.09%
Oil $48/bbl
Gold $1218/oz.

Europe and Asia:
AUD GDP 3.1% vs. 2.7%
EUR EZ Final PMI 51.5 in line
GBP UK PMI 50.1 vs. 49.9
GBP Mortgage Approvals 66.3K vs. 68.7K

North America:
USD ISM Manufacturing 10:00

Japanese Prime Minister Abe surprised markets in Asian session trade by announcing that he would delay the planned sales tax hike by 2.5 years sending USD/JPY plunging below the 110.00 level before the pair stabilized.

Although the markets anticipated some sort of delay the 2.5 year time span was unexpected indicating that Japan will have to continue deficit spending along with QE for the foreseeable future. The news was initially viewed as negative to risk flows with Nikkei dropping by more than 1% as Mr. Abe decision suggested that his famous three arrows approach to generating growth was failing to reach its goal. With Japanese recovery still fragile and consumer spending subdued another hike in the sales tax was viewed by Mr. Abe’s policy team as just too contractionary for the economy at this time.

USD/JPY triggered a torrent of stops in reaction to the news dropping to a low of 109.64 before retaking the 110.00 level in London dealing. Risk aversion flows could dog the pair into North American trade if US data proves disappointing and drags equities down with it. Having broken the 110.00 figure the sentiment on USD/JPY has now turned slightly negative and only upside US eco data reports could turn the tide back up.

Meanwhile elsewhere in Australia the GDP data come in far better than forecast at 3.1% versus 2.7% eyed with exports and household spending contributing to the impressive beat. The news out of Australia has been considerably better than expected and has dampened speculation that RBA will cut rates further at its next meeting in June. Aussie jumped to touch the the 7300 barrier but backed off the level on AUD/JPY selling in the wake of Abe’s announcement.The pair has found some support near the 7200 level over the past several weeks and may be basing for another run at the 7400 level, but with AU fixed income markets still convinced that rate cuts are coming any upside in the pair may be limited.

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