Market Drivers Nov 16, 2015

Markets stabilize post Paris attacks
USD/JPY reverses earlier losses to test 123.00
Nikkei -1.04% Eurostoxx 0.34%
Oil $41/bbl
Gold $1092/oz

Europe and Asia:
NZD Retail Sales 1.6% vs. 1.1%
JPY Preliminary GDP -0.2% vs. -0.1%

North America:
CAD Manufacturing Sales 8:30

USD Empire Manufacturing

USD/JPY sold off at the open of week’s trade as currency markets reacted to the atrocious terrorist attacks in Paris on Friday, but the fear was short lived and the pair climbed steadily throughout the night as it tested offers at the 123.00 level.

The escalation of geopolitical tensions and sheer shock of the Paris attacks which were the worst loss of live in the city since 1944, created for a tense and cautious open in today’s trade with investors fearful that the new round hostilities could cast a pall over any move to normalize monetary policy by the Fed. However as the night wore on the tension dissipated and a rally in European stocks helped push USD/JPY to 123.00.

Historically, terrorist events like Friday’s Paris attack tend to have minimal long term impact in the markets, given the complexity of the issue and the possible military escalation of activities in the Middle East it may be too early to dismiss any knock economic effects on global growth. If ISIS is able to further terrorize western targets the massive toll on consumer psychology and as well the sharp increase in security spending could quickly halt any move towards policy normalization as monetary authorities react to the unexpected geopolitical threats.

For now the conventional wisdom continues to believe that the Fed will lift rates in December as US economic activity continues to expand at a steady pace. But such a scenario presupposes no further attacks on western targets. Any additional terrorist incidents would quickly change the calculus of FOMC and could upend market’s placid assumptions.

Meanwhile on the economic front the data calendar is very quiet today with only a smattering of second tier releases on the docket. In Japan the preliminary GDP data showed a larger than expected contraction for Q3 at -0.2% versus -.1% eyed and sent the country into a recession for the second time under Prime Minister Abe. There was little to like in the release as Capex spending was much worse that expected. Although there is little to suggest that BOJ will increase its QE program for now, if the data does not improve policymakers may be forced to expand the stimulus which is yet another reason for why USD/JPY continues to exhibit strength.

In North American trade today the calendar is very quiet with only Empire Manufacturing on the docket, and price action will no doubt be driven by equity and fixed income flows. If buy the dip mentality extends into New York trade USD/JPY could squeeze higher as the day proceeds with longs testing the 123.50 level before the day’s end.

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