Market Drivers for August 13, 2013
Abe hints a corporate tax cut sending USD/JPY towards 98.00
UK inflation data in line
German ZEW beats but IP comes in weaker
Nikkei 2.57% Europe 0.57%
Oil $106/bbl
Gold $1338/oz.

Europe and Asia:
AUD NAB Business Confidence -3 vs. 0
JPY BOJ July 10-11 Meeting Minutes
JPY Machine Orders
EUR German CPI 0.5% vs. 0.5%
EUR German ZEW Survey (Economic Sentiment) 42.0 vs. 40.3
EUR EZ Industrial Production 0.7% vs. 1.0%
GBP CPI 2.8% vs. 2.8%
GBP PPI 1.1% vs. 1.2%

North America:
USD Advance Retail Sales 8:30
USD Business Inventories 10:00

The dollar gained strongly against the yen, but held steady against the euro and cable in quiet summer London trading session as markets absorbed the UK inflation data and the German ZEW release.

In Japan, USD/JPY continued its impressive recovery for the second day in a row as it climbed towards the 98.00 figure after speculation that Prime Minister Abe may cut the corporate tax rate as part of his reform package and in order to offset some of the dampening effects of the proposed sales tax.

The pair climbed steadily throughout the night boosted by the greater than 2.5% rise in the Nikkei as Japanese stocks responded to the prospect of better profits due to lower taxes. On the economic front the Japanese data was better as well with Core Machinery Orders dropping by -2.7% versus -7.1% forecast.

Whether USD/JPY can continue its rebound will now depend on US data. Today’s US Retail Sales numbers are going to be a very important data point for the market, providing a first hand look at the strength of the consumer. The market is looking for a jump in the core number to 0.4% from 0.0% the month prior and if spending does improve the news should help push USD/JPY higher as expectations of a Fed taper in September will grow.

However, if the data shows weakness for the second month in a row, the currency and fixed income markets will begin to doubt the tapering scenario, with US rates likely retreating. That in turn could put a cap on the USD/JPY recovery rally at the 98.00 figure as hesitation takes hold.

In Europe, the data was generally supportive for both the euro and cable. In Germany the ZEW survey printed better than forecast at 42 versus 40.3 as investors were buoyed by the recovery prospects in the region. The one minor damper in the data was the less than expected rise in Industrial Production which climbed 0.7% versus 1.1% eyed. Nevertheless, this was an improvement over the -0.2% decline the month prior and further proof that EZ is starting to recover.

In UK the inline inflation data was welcome by cable bulls with the pair rising to session highs in the aftermath of the release. With price pressures starting to moderate the BOE will be under no hurry to curtail its accommodative monetary policy keeping rates at low levels which should help UK economy to continue to rebound. Still, cable is unlikely to rally much until the market gets a glimpse of tomorrow’s UK employment data.

With focus now shifting towards the US session, the Retail Sales numbers could prove to be the key event of the day and could determine if USD/JPY can burst through the 98.00 figure or be rejected at this level as the day proceeds.

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