Market Drivers July 26, 2016

USDJPY sinks 2 big figures on disappointment of stimulus
Cable bounces off lows
Nikkei -1.60% Dax 0.14%
Oil $42/bbl
Gold $1329/oz.

Europe and Asia:
GBP UK BBA Loans 40B vs. 38B

North America:
USD PMI Services 9:45
USD Consumer Confidence 10:00
USD New Home Sales 10:00

USDJPY dropped nearly two big figures in a wildly volatile Asian session trade today, after markets became disappointed with the size of the expected stimulus package by the Abe administration.

Last week rumors circulated that the government supplemental spend may be as large as 20-30T yen, but the trickle of details released today suggested the figures to be much more modest with overall package only at 6T yen and of that just 2T to be allocated to the supplementary budget.

The news rattled the currency markets triggering wave upon wave of USD/JPY selling as many of the longs built up positions over the past few weeks exited the trade. The pair now finds itself near the 104.00 support and facing two event risks as the week proceeds. Tomorrow the market will get a glimpse at the FOMC statement which is not expected produce any change in policy but may hint at a more hawkish view of the Fed.

Since Brexit, the global capital markets have calmed down and US data has surprised to the upside suggesting that growth remains steady and wages continue to rise at a modest level. Some analysts believe that this could prompt the Fed to indicate that September meeting may be “live” i.e. open to the prospect of rate hikes.

We continue to doubt such a scenario given the most partisan political climate in decades, but if the market becomes convinced that the Fed will hike USD/JPY could certainly get a boost perhaps back towards the 106.00 level. However, without a much more aggressive accommodation stance from the Japanese authorities, the pair is unlikely to break above the 107.50 highs set last week and every rally will simply be an opportunity to establish fresh shorts.

In North America today the event rik focus will be on New Home Sales and consumer confidence with most experts anticipating mixed results. A better than expected print however, could help reverse some of the overnight flows and put USD/JPY on a path to 105.00 as the day proceeds.

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