Market Drivers Feb. 11, 2016

USD/JPY drops like a stone in early European trade
Gold breaks $1200/oz.
Nikkei -2.31% Eurostoxx -2.96%
Oil $26/bbl
Gold $1223/oz

Europe and Asia:
no data

North America:
USD Unemployment Claims
USD Yellen Testimony 10:00

It’s been another night of sheer panic in the currency markets with USD/JPY slicing through more levels as it dropped below 111.00 figure in early European trade before finally finding a modicum of support. Yen has been the primary source of turmoil in the capital markets and its 1000 point gain in the face of negative rates by the BOJ has been a stunning rebuke of monetary policy by the market.

With Japanese markets closed for holiday the BOJ has been eerily silent as their plans to weaken the yen have been thoroughly destroyed by the market. With yen having now strengthened by more than 7% since the start of the month, Japanese monetary officials must be increasingly concerned about the threat to growth and the prospect of new deflationary pressures in the economy.

Mr. Kuroda and company have few options left, but the chances of intervention have increased markedly especially if dollar bears try to push the pair below the key 110 level later in the day. In the past however efforts at intervention have quickly fizzled as markets resumed selling the moment BOJ stopped the buying. Any new attempt to prod USD/JPY higher may meet a similar fate, but the BOJ may have no choice. Japanese exporters are hedged at around 115.00 rate and at current exchange rates their profits margins are sure to be squeezed.

The turmoil in the capital markets is quickly turning into a serious threat to the global economy. Although policymakers are lulled by the relatively benign data from the “real” economy, the collapse of financial markets could quickly translate into very nasty contraction both the emerging world and G-20 economies.

Today Ms. Yellen will face her second day of testimony in Congress. Yesterday she endured a series of very hostile questions regarding internal Fed operations, but given the events overnight its will interesting to see if she is questioned on the broader macro themes and whether she expresses fresh concern over the state of capital markets

With currencies in a state of panic, today’s North American session will doubt be volatile and with USD/JPY within striking distance of the 110 figure the temptation of the shorts to press their hand will be very strong but the closer we get to that level the higher the chance of BOJ intervention becomes.

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