Market Drivers August 22, 2016
Kuroda comments lead USD/JPY rally
Fischer hints of rate hikes to come
Nikkei 0.32% Dax 0.76%
Europe and Asia:
CAD Wholesale Sales 8:30
Dollar opened up the week stronger rising against all of its major trading partners on the back of comments by BOJ Governor Kuroda and FOMC Vice-Chair Stanley Fischer.
The buck bolted out of the gate on Sunday open gaping higher against the yen as traders pushed the pair to 100.85 before profit taking kicked in. Over the weekend Governor Kuroda noted that negative rates have not reached their limits and hinting that more accommodation may come in September.
As we stated exhaustively over the past few weeks, the Japanese monetary policy officials are extremely displeased with the USD/JPY exchange rate which at 100.00 is highly deflationary for the country’s economy. Last week’s horrid Trade data was just the latest indication that the strength of the yen is wreaking havoc with plans to stimulate growth and is clearly frustrating all policy initiatives. Short of intervention, which has proven futile in the past and which many market players do not believe will kick in until USD/JPY hits 95.00, Japanese policy officials are left with two choices – jawboning and further monetary accommodation.
The comments over the weekend were clearly intended to lift the pair away from the 100.00 figure and for the time being appear to have reached its goal. Long term however, the fate of USD/JPY is likely to be dependent on US policy actions and that that end the market received further hints that Fed officials may be moving to a tightening bias.
Over the weekend Fed Vice Chair Stanley Fischer, considered to be the second most influential member on the board and himself the former head of the Bank of Israel, stated that the Fed is “close to its targets” with respect to growth, inflation and employment which suggests that the FOMC will entertain a rate hike before the end of the year. Mr. Fischer is only the latest Fed official to assume a decidedly more hawkish posture in recent weeks, indicating that the Fed may be eager to begin to normalization process sooner rather than later.
Ultimately however, the true signal will come from Fed Chair Janet Yellen, who is expected to speak this Friday at the Jackson Hole Central Bank symposium and may provide the clearest indication yet of Fed’s next policy moves. Ahead of that meeting the dollar may continue to find a bid with USD/JPY looking to break above the 101.00 figure while EUR/USD remains capped the 1.1300 level. With no data on the docket today, the key question for the market will be whether the North American session will extend the dollar breakout beyond the day’s highs.