Drops and Pops Abound as FX Trade Turns Turbulent

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Market Drivers September 10, 2015

USD/JPY pops nearly 100 pips on comments of more QE but retraces
Commdollars pop as off shore yuan hits daily gain on record
Nikkei -2.5% Europe -0.97%
Oil $44/bbl
Gold $1106/oz

Europe and Asia:
RBNZ lowers by 25bp and talks kiwi down
JPY Machinery Orders -3.6% vs. 3.4%
AUD AU Employment 17.4K vs. 5K eyed

North America:
GBP BOE Decision 07:00

USD Weekly Jobless 08:30

It’s been a very volatile night of trade in the FX market with the usually sleepy Asian session generating a lot of newsflow that resulted in massive spikes and reversals in Aussie, kiwi and yen.

In Japan senior LDP lawmaker Kozo Yamamoto created a firestorm in USD/JPY when he noted that the country needs an extra 3-5 Tln yen in the spending budget in the fall and went so far as to suggest that the government should issue more JGBs to allow the BOE to expand its QE program.

Such an action would be outside of the current BOJ mandate and it is not at all clear whether BOJ chief Kuroda even supports such a move, but Mr. Yamamoto heads the economic advisory council and therefore was taken seriously by the market. USD/JPY verticalized by nearly 100 points rising to a high of 121.37 in a pure liquidity vacuum, before retreating to 121.00 as profit taking kicked in.

The markets are by no means certain that Japan will engage in yet another round of QE in October, but the recent weakness in Japanese economic data (today’s disappointing Machinery Orders was the latest report to miss its mark) may be pressuring pressuring policymakers to resume the stimulus program and could make Fed’s own policy considerations a lot more complicated.

Meanwhile in Australia and New Zealand a slew of economic data created its own storm as both pairs moved more than 1% up and down in reaction to the news. In New Zealand the RBNZ cut its benchmark rate as expected by 25bp but surprised the market with a generally dovish statement suggesting that it wanted to see the kiwi lower. The pair fell to a low of .6255 before recovering in Europe on news that PBOC lowered its criteria for yuan pooling as it continues to ease monetary conditions at home.

In Australia the news was decidedly more positive with AU employment rising to 17.4K from 5K eyed as the country registered a second strong month of job growth. Most encouraging in the data was the fact that full time jobs composed the majority of the gain rising by more than 11K. The Aussie rose steadily through the night taking out the 7000 figure and aiming for the 7100 level. Given its massive oversold conditions the pair could be ripe for a short covering rally that could squeeze the latecomers all the way to .7400 resistance level.

In North America today the calendar is light, with only the jobless claims on the docket, but given the overnight volatility currency markets are likely to remain turbulent with commodity dollars possibly extending their gains if US equities put in a rally.

Boris Schlossberg
Managing Director

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