Discord on BOJ as USD/JPY Continues to Sink

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Market Drivers September 7, 2016

AU GDP Misses
UK MP/IP mixed
Nikkei -0.55% Dax 0.20%
Oil $45/bbl
Gold $1353/oz.

Europe and Asia:
AUD GDP 0.5%v vs. 0.6%
GBP UK MP -0.9% vs. -0.4%
GBP UK IP 0.1% vs. -0.2%

North America:
CAD BOC Rate 10:00
CAD Ivey PMI 10:00

It’s been a generally quiet night of trade in the FX market today but USD/JPY once again took a tumble dropping nearly 100 points in a matter of minutes at the start of Asian trade before stabilizing for the rest of the session.

The trigger for the fall was a story by Sankei that the BOJ is struggling to come up with consistent monetary policy message for the market. There is apparently a lot of disagreement on the board as to the extent of unconventional measure that should be implemented. Governor Haruhiko Kuroda seen to be a negative interest rate supporter. Deputy Governor Kikuo Iwata is seen to support expanding monetary base while Takahide Kiuchi, Takehiro Sato appear to oppose additional easing.

The discord on the BOJ is exacerbated by the fact that US economic data is decelerating putting in doubt any prospect of Fed rate hike this year and therefore only adding to the woes of strengthening USD/JPY. Yesterday’s ISM Non-Manufacturing number was the second shocker in a week dropping 4 points as it printed at 51.4 versus 55.4 barely staying above the 50 boom/bust line. The ISM Manufacturing report last week dipped below that mark, indicating that the sector has moved into contraction.

Given the news, the Fed may now face mounting pressure to remain on hold in September despite the relatively buoyant labor market. That in turn will keep US rates depressed and put further pressure on USD/JPY, frustrating the Japanese authorities efforts to weaken the currency and escape the deflationary spiral.

USD/JPY found bids ahead of the 101.00 level and rebounded to 101.60 by mid morning London dealing, but the pair remains under pressure especially ahead of next week dual BOJ/FOMC set of meetings on the same day. Several BOJ advisors have argued that the BOJ should wait for Fed to move before committing to any additional QE efforts, but with Fed action now highly unlikely the BOJ may have to go at it alone in trying to prop up the USD/JPY pair.

With no US data on the docket today USD/JPY could remain rangebound for the rest of the session, although any decline in US yields could send it towards 101.00 once again. Instead the focus in North America today will be on the loonie with both BOC rate decision and Ivey PMI due at 1400 GMT. The BOC is expected to remain stationary, but the market will look at the tone of the statement and more importantly its forward guidance to see if the BOC expects any rebound later this year. Any dovish tilt could push USDCAD back towards the 1.3000 level as the day proceeds.

Boris Schlossberg
Managing Director

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