Market Drivers for October 31 2014

BOJ shocks the market with expansion of QE USDJPY skyrockets to 111.50

German retail sales dive

Nikkei 4.83% Europe .46%

Oil $80/bbl

Gold $1174/oz.

Europe and Asia:

AUD AU PPI 0.2% vs. 0.2%
JPY BOJ takes QE to 80 Trillion yen

EUR GE Retail Sales -3.2% vs. -0.8%

North America:

USD PI/PS 08:30

CAD GDP 08:30

USD Chicago PMI 09:45

USD Revised U of M

The Bank of Japan shocked the currency market today by announcing a surprising expansion of its QE program which sent USD/JPY to highs not seen since 2008 as the pair broke through the 111.00 barrier in Asian session trade. The dramatic new increase in QE was utterly unexpected by the market with Nikkei soaring nearly 5% in response to BOJ new policy actions.

The BOJ announced that it will expand QE by 80 Trillion yen, buying 8-10 Trillion of JGBs per month. It stated that it will triple the annual pace of buying ETFs and JREITS and that it will extend the duration of JGBs in its inventory to 7-10 years. The vote for this move was far from unanimous passing only by 5-4 margin as board members Morimoto, Ishida, Sato and Kuichi voted against the proposal.

In addition to the BOJ news the GPIF also officially confirmed that its will reduce its JGB target to 35% from 60% prior and will radically increase its allocation to equities with domestic stocks rising to 25% from 12% and foreign stocks getting a similar bump in capital flows.

Taken altogether this was a massive infusion of fresh liquidity into the Japanese capital markets and it highlights the BOJ determination to wipe out deflationary forces. The authorities were likely emboldened to radically expand the monetary base because of the recent fall in oil prices. Since Japan imports more than 90% of its energy needs, the recent collapse of oil prices has acted as massive price deflator for the country’s economy allowing policy makers to become much more aggressive with unconventional tools.

The move by BOJ now creates a clear policy divergence between US and Japanese authorities and puts USD/JPY squarely on a path towards 115.00 if US data continues to show steady economic expansion. Tonight’s surprising action by the BOJ also puts pressure on the ECB to expand its unconventional tools portfolio and consider a massive QE program of its own. The EZ region is now experiencing even greater deflation than Japan and European monetary authorities who have been reluctant to commit to further easing may now feel greater latitude to do so given the BOJ announcement.

There is no doubt that the EZ is in dire need of stimulus. Today’s German Retail Sales showed a colossal collapse in demand dropping -3.2% versus -0.8% eyed as consumer has clearly retrenched in the wake of the slowing activity in the region. Although the latest PMI numbers out of Germany show that economic activity remains mildly expansionary, the situation in the region is precarious and tonight’s action by the BOJ may give European policymakers food for thought with respect to their own problems with deflation.

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