Market Drivers for May 22, 2013
BOJ would decide on further JGB purchases sends USD/JPY towards 103.00
UK Retail Sales worst since April 2012 Cable below 1.5100
Nikkei 1.60% Europe 0.06%
Oil $95.81
Gold $1381/oz.

Europe and Asia:
AUD Westpac Consumer Confidence -7.0% vs. =5.1%
JPY Merchandise Trade Balance Yen -.76T vs. -.63T
JPY BOJ Monetary Policy Statement
GBP BOE Minutes QE at 6-3
GBP Retail Sales -1.3% vs. 0.0%
GBP Public Finances 8.0B vs. 7.6B

North America:
USD Fed’s Bernanke Testifies on Economic Outlook 10:00
USD Existing Home Sales 10:00
USD Fed Releases Minutes from Apr 30-May 1 FOMC Meeting 2:00
CAD Retail Sales 8:30

Cable hit a fresh weekly low in the aftermath of very weak UK Retail Sales and relatively dovish MPC minutes, while USD/JPY flirted once again with the 103.00 figure post BOJ meeting in what was a relatively sedate night of trade in FX ahead of today’s closely watched testimony of Ben Bernanke in front of the US Congress.

In UK the Retail Sales sales data suprised to the downside printing a horrid -1.3% versus 0.0% forecast. This was the worst reading since April 2012 and was driven by a sharp drop in food store sales and weak sales of summer items due to bad weather conditions. Some of the decline may have been seasonal but the overall number suggests UK consumer demand remains weak and despite the recent spate of better than expected economic numbers, the UK economy remains vulnerable to further contraction.

Little wonder then that the MPC minutes revealed a surprisingly dovish stance with 3 or of the 9 members continuing to vote for more QE. Outgoing Governor Mervyn King along with Miles and Fisher all voted for another 25B GBP QE arguing that the slack in the labor market and risks of Eurozone weakness required additional stimulus. For the majority members however, an increase in QE could have created doubts about price stability and therefore they refused to make such policy action right now.

Still, with UK pricing pressures clearly receding the prospect of more QE from the BoE has increased, especially if the economic data begins to wobble again. Cable reacted negatively to the news dropping below 1.5100 level and may test the 1.5000 figure later in the day if the dollar catches a bid.

The dollar gained against the yen in late Asian trade after the BOJ presser in which Governor Kuroda reaffirmed most of the central banks policies and shrugged off the recent volatility in the JGB market. Japanese officials later noted that they were looking at ways to stabilize the movements in JGB which helped to rally USD/JPY to within a few pips of the 103.00 but the pair failed to clear that barrier so far.

Currency traders remain cautious ahead of today’s testimony in front of Congress by Fed Chairman Ben Bernanke. Conventional wisdom suggests that the Chairman will maintain a relatively dovish posture refusing to commit to a timetable given the slowing pace of the US recovery and the ongoing contraction in the Eurozone. If he sticks to the script the dollar should weaken with EUR/USD likely rallying to 1.3000 and USD/JPY dropping to 102.00. However, if the Chairman surprises the market, the up move in the dollar could be colossal with USD/JPY likely making fresh highs at the 104.00 handle.

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