Market Drivers Feb. 10, 2016

BOJ does a call around to halt USD/JPY but still under 115
UK Data IP much worse
Nikkei -2.31% Eurostoxx 2.34%
Oil $29.50/bbl
Gold $1183/oz

Europe and Asia:
GBP UK IP -1.1% vs. 0.1% eyed

North America:
USD Yellen Testimony 10:00

The greenback was better bid ahead of Janet Yellen’s testimony in front of Congress today after yet another night of risk aversion that saw USD/JPY dip to a low of 114.25 in early Asian session trade.

The BOJ was forced to do a “call around” – a soft version of intervention where the central bank calls dealers to check quotes and effectively puts market on notice that they are willing to buy to support the pair. The move did put a stop to ceaseless selling, but the Nikkei still ended the day down by more than -2%. The European session however, saw risk flows improve with Euro Stoxx rising by 2% led by a rebound in Deutsche Bank shares.

Overall the market appears to be finding a shaky bottom for the time being with the dollar no longer falling like a stone as the 114.00 figure is holding in USD/JPY and 1.1300 level is firm resistance in EUR/USD.

The Yellen testimony will be the marquee event of the week for FX and although the Fed Chairwoman is generally dovish in her testimony today she may chose to assume a more hawkish tone in order to preserve Fed’s policy options. Although no serious market analyst expects the Fed to hike rates in March, Ms. Yellen and company will want to at least maintain the illusion of tightening in order to demonstrate Fed’s independence of the market.

To that end Ms. Yellen may try to minimize the turmoil in global capital markets and may focus on the improving US labor market conditions which showed that wages rose at their fastest pace in 8 years. If she follows this script, the greenback could see a rebound as the day progresses with USD/JPY targeting 116.00 and EUR/USD moving back below the 1.1100 figure. After such relentless selling of the buck, today’s testimony can be the perfect excuse for a short squeeze.

However, if Ms. Yellen offers a more cautious tone and suggests any possible slowdown in growth, the market which is already heavily skewed against the buck could push USD/JPY through the 114.00 barrier as Ms. Yellen would simply confirm the panic that has been riling markets all week long.

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