Market Drivers Feb. 23, 2016

IFO misses driving Euro below 1.1000
JPY has another volatile session in Asia as Kuroda wobbles
Nikkei -0.37% Eurostoxx -0.85%
Oil $32/bbl
Gold $1219/oz

Europe and Asia:
EUR GE GDP 0.3% vs. 0.3%
EUR IFO 105.70 vs. 107

North America:
USD Consumer Confidence 10:00
USD Existing Home Sales 10:00

It’s been a volatile night of trade in Asia where yen briefly dipped below the 112.00 figure after traders reacted negatively to BOJ Governor Kuroda’s testimony in Parliament. Mr. Kuroda appeared to back away from his earlier comments regarding the efficacy of QE spooking markets as he talked.

USD/JPY dropped to as low as 111.85 before very quickly rising to 112.60 in what some market participants took to be a quick dose of intervention by the BOJ. Japanese policy makers are
clearly frustrated by market action in the foreign exchange. The negative rate gambit has failed spectacularly as USD/JPY lost nearly 1000 point in the aftermath of the decision completely reversing the BOJ’s intention of weakening the currency.

USD/JPY is now well below the 115.00 level which has been the implied rate for the year of many Japanese corporates such as Toyota. With most of the corporate hedges now underwater, the pressure on profits and growth will increase only complicating BOJ’s task of stimulating inflation and expansion.

It appears that Japanese officials have decided that 110.00 USD/JPY exchange rate will be the “line in the sand” and are intent to keep the pair above that level for the time being. Past history of BOJ interventions has been generally ineffective especially against a background of risk off appetite. That’s why the single biggest factor in whether USD/JPY can keep its bid will likely be the Fed rather than the BOJ and with Fed decidedly neutral for the time being the downward pressure on USD/JPY is likely to continue.

Meanwhile in Europe the economic data continued to disappoint with IFO badly missing its mark at it printed at 105.7 versus 107 eyed. Most glaring of all was the sharp drop in expectations to 98.8 from 102.2 in January. The trend clearly indicates that German corporates are becoming much more concerned about global demand in China and US but also in EZ as well. The much tougher macro economic conditions along with the stress on the domestic economy from the refugee crisis makes German economy particularly vulnerable this year and could in turn drag overall EZ growth down as well.

The EUR/USD fell through the key 1.1000 support level in response to the news and remains near those levels ahead of North American trade. The US calendar is light with only existing home sales and consumer confidence on the docket and shorts may want to take another run at the 1.1000 support as the day proceeds.

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