Market Drivers for September 5th, 2013
Kuroda – BOJ will stimulate if sales tax hurts growth
USD/JPY through 100.00 but stalls at key level
Nikkei .08% Europe .12%
Oil $107/bbl
Gold $1387/oz.

Europe and Asia:
AUD Trade Balance -0.77B vs. 0.10B
BOJ – policy unchanged for now
GBP BOE rate announcement
EUR ECB rate announcement

North America:
USD ADP 8:15
USD Weekly Jobless 8:30
USD ISM Services 10:00

USD/JPY broke through the psychologically key 100.00 level today as BOJ governor Kuroda assured the markets that the central bank will offset any adverse effects of the proposed new sales tax with a more aggressive monetary policy. In the BOJ press conference following the monthly meeting, Mr. Kuroda noted that the central bank saw no need to take further action now, but stood ready to provide more liquidity should the Japanese economy begin to slow once again.

It appears that Japanese policy makers are coming to the conclusion that the national sales tax hike to 8% from the current level of 5% will indeed take effect. Officially, the Japanese government noted that the final decision will be announced by PM Abe at the start of October, but Mr. Kuroda’s remarks left no doubt as to where he stood. The BOJ chief noted that markets needed to see some fiscal discipline and would lose trust in the Japanese government if the sales tax plans were delayed.

It is clear that Japanese monetary officials are afraid that an expansionary monetary policy without the concomitant fiscal tightening could wreak havoc in the JGB market, but by arguing for the sales tax now, they risk the prospect of snuffing out the country’s nascent and fragile economic recovery. Although economic activity has definitely improved with unemployment at 5 year low and capital expenditure turning positive, final demand remains relatively weak and any increase in taxes could have serious dampening impact on consumer spending.

By mid morning London dealing much of the enthusiasm over Mr. Kuroda’s comments had faded and USD/JPY drifted back below the 100.00 level as profit taking kicked in. The rally in the pair can only be sustained if the US data proves to better than expected, convincing the market that the Fed taper will be announced soon which in turn should help US yields to rise. To that end today’s ISM Services report is likely to be crucial to the near term direction of the pair with traders focusing primarily on the employment subcomponent to get a better reading on the NFP data due tomorrow.

USD/JPY is also caught in a seesaw battle between the relatively buoyant US economic data and the specter of geopolitical risk as the situation in the Middle East grows more perilous. Today’s news that the Egyptian minister of the Interior narrowly escaped an assassination target shows that the whole region – not just Syria – is a cauldron of turmoil that could quickly spark risk aversion flows in the capital markets. Therefore, USD/JPY may continue to be pushed and pulled by these two opposing forces for the foreseeable future.

In Europe today, all eyes will be on the ECB press conference at 12:30 GMT, although few market player anticipate any news from Mr. Draghi and co. The ECB chief will no doubt reiterate the notion that interest rates will remain low for the foreseeable future, even as the EZ economy has shown signs of recovery. However if he demurs on the prospect of negative interest rates, given the clear improvement in EZ economic activity, the EUR/USD may see a bit of a boost as trades back towards the 1.3250 level.

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