Market Drivers May 9, 2016

UK Trade Data beats on headline
Aso jawbones the yen
Nikkei 2.15% Dax 1.07%
Oil $44/bbl
Gold $1268/oz.

Europe and Asia:
CNY CPI 2.3% vs. 2.3%
EUR GE Current Account 30.4B vs. 25B
GBP UK Trade Balance -3.8B vs. 4.2B

North America:

USD/JPY continued it short covering rally in Asian and early European trade today taking out the 109.00 figure after Japanese Finance Minister Taro Aso warned that one sided moves in Japanese yen will not be tolerated.

Speaking to reporters Mr. Aso noted that Japan has no interest to manipulate rates on a long term basis but warned that one sided moves in the currency will not be accepted. He stated that, “Currency moves have been one-sided and if this move accelerates, we’re determined to stop it.”

The new aggressive tone from Mr. Aso, whose Finance Ministry has the actual responsibility for exchange rate policy, was taken seriously by the market with USD/JPY rising steadily through the night as it took out the 109.00 barrier with narily a retrace. Japanese officials are clearly fed up with persistent yen strength in the market especially in light of BOJ’s massive QE program that has expanded money supply by 3X.

Although the MOF is unlikely to give the green light for intervention at current levels, Mr. Aso statements were clearly meant to serve as “brushback pitch” putting the market on notice that any further yen strength will not go unanswered. Japanese officials are especially keen to keep USD/JPY above the 105.00 level which would be very onerous for the country’s critical export sector most of which is hedged much higher at 115.00. Ideally Mr. Aso and company would like to see USD/JPY trade above the 110.00 figure with markets naturally pushing the pair above that mark.

Whether Mr. Aso’s soft form of intervention will work remains to be seen, but given the grossly oversold state of USD/JPY a short covering rally was due and his comments came at a right time helping to spark the move in a generally quiet listless market.

In North America today the calendar remains quiet with no major economic data on the docket and trading could be subdued for the rest of the day. Having taken out the 109.00 barrier USD/JPY is likely to find further upside action to be more challenging as fresh shorts are likely to pop out of the woodwork ahead of the psychologically key 110.00 figure. For now however, Mr. Aso has certainly turned the sentiment in the market and USD/JPY looks to be a buy the dip trade for the foreseeable future.

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