Market Drivers for May 30, 2013
Nikkei dives 5% taking USD/JPy to 100.50
Aussie rebounds on better housing/capex data
Nikkei -5.15% Europe 0.15%
Oil $93/bbl
Gold $1406/oz.

Europe and Asia:
AUD Building Approvals 9.1% vs. 4.0%
JPY Japan Buying Foreign Bonds -1117B vs. -800B
JPY Japan Buying Foreign Stocks
EUR Euro-Zone Economic Confidence
EUR Euro-Zone Consumer Confidence
GBP Nationwide House Prices 0.4% vs 0.4%

North America:
USD GDP 8:30
USD GDP Price Index 8:30
USD Personal Consumption 8:30
USD Core Personal Consumption Expenditure 8:30
USD Initial Jobless Claims 8:30
USD Pending Home Sales 10:00

Another very volatile night in Asian equity markets sent USD/JPY to fresh session lows of 100.47 after Nikkei dropped by more than 5%. The topsy turvy price action in Japanese equities and fixed income markets drove the price action in USD/JPY with the pair seesawing from a high of 101.50 to a low of 100.50 as nervous investors bailed on their positions.

We have been noting for a while that the Achilles heel of the BOJ’s massive QE program was the JGB market and specifically the long end of the curve. Unlike the Fed the BOJ is struggling with rate repression as the bond market remain volatile. Today’s comments by a slew of Japanese officials reflect that concern with BOJ chief Kuroda noting that he would like to see lower JGB volatility so as to put downward pressure on long term yields. He admitted that yield volatility reduces the impact of monetary easing.

Indeed one of the unintended consequences of the BOJ action is that mortgage rates may be rising in Japan and if that becomes the new dynamic then it could have a massive dampening effect on growth going forward. In the meantime USD/JPY continues to drift lower towards the key 100.00 mark and we believe that that support will likely be tested in the near term.

Elsewhere, the Aussie staged a strong comeback after Building permits and capex data reports. Building Approvals surged by 9.1% versus 4.0% forecast as housing demand remains robust. The marquee report however, was the capex numbers. The headline number was much worse than expected at -4.7% in Q1 and Aussie initially plunged on the news, but the future investments data was pegged at 156B which was larger than market expected and AUD/USD rallied once traders had a chance to absorb the news.

The Aussie appears to have made a near term bottom around the .9500 level and may now be due for a corrective rally to the upside as short covering and bargain hunting kicks in. Part of the reason for the currencies decline has been investor fears of further rate cuts by the RBA. Indeed issuance of Aussie Uridashi bonds have fallen 71% on a year over year basis. But those fears may be overblown especially if CAPEX figures hold up and RBA sees no reason to prop up demand in the foreseeable future. If Aussie can recapture the 9700 figure then it may be on its way towards 9900 as short covering kicks in.

With little data in Europe, the focus in FX is likely to turn to North America where jobless claims, pending homes and PCE data for Q1 will provide fodder for the markets. If US data surprises to the upside it could provide a small boost to USD/JPY and perhaps push the pair through the 101.00 figure. However if the data misses it could exacerbate the selloff and send the pair towards the key 100.00 level as the day progresses.

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