Market Drivers May, 2o, 2013
Japanese Economics Minister suggests that yen weakened enough
Italian data improves boosting euro
Nikkei 1.47% Europe 0.24%
Oil $95/bbl
Gold $1347/oz.

Europe and Asia:
EUR Italian Industrial New Orders 1.6%

North America:
USD Chicago Fed Nat Activity Index 8:30

With German, French and Canadian markets on bank holiday today, the action in FX was generally subdued on the first trading day of the week with only USD/JPY experiencing some volatility in early Asian trade.

The move in USD/JPY was caused by comments from Japanese Finance Minister Amari who stated in a Sunday TV interview that, “it’s being said that the correction of the strong yen is largely completed. If the yen keeps on weakening a lot more, it will have a negative impact on peoples’ lives”.

The comment instantly pushed USD/JPY in thin pre-Tokyo trading with the pair tumbling nearly 100 points in matter of minutes before bargain hunters swooped in and brought it back above the 102.50 level where it has quietly traded through most morning European trade.

It’s difficult to say if Mr. Amari’s comments were simply a political ploy to appease the international critics of Japanese ultra easy monetary policy or whether they were made out of genuine concern for the fact that the the weaker yen is driving up energy costs in the Land of the Rising Sun. We doubt that Japanese officials are satisfied with the current exchange rate level and may have simply wanted to slow the rate of ascent of USD/JPY in order for the Japanese economy to absorb the recent price changes.

What is remarkable about today’s price action is that USD/JPY refused to buckle despite Mr. Amari’s attempts to talk it down indicating the strength of the momentum in the pair. Still USD/JPY is clearly overbought and is due some pause and correction in the near future. Much of the recent strength in the pair has been driven by speculation that the Fed will begin to move to a more neutral monetary posture in the near future. We remain highly sceptical that this will occur.

With US economic data showing some recent weakness we doubt that the Fed will make any adjustments in QE policy that could dampen overall demand. This week the market will get a glimpse of the FOMC minutes which should offer a deeper view of the Fed’s current position. If there is indeed a change of tone then USD/JPY could hit fresh highs as the week proceeds. However, if the Fed simply reaffirms its current policy and offers no suggestion of any tightening in the foreseeable future then the much anticipated correction in USD/JPY will likely begin.

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