FX Drama All Around as EUR/USD & USD/JPY Seesaw

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Market Drivers Jan.23, 2013
BOJ confirms 2% target but offers no time table USD/JPY sell offs
ZEW blows out estimates to upside, Weidemann rumor quashed
Nikkei -0.35% Europe -0.52%
Oil $95/bbl
Gold $1693/oz.

Europe and Asia:
BOJ Presser 2% targeted but no timeline
GBP PSNB 13.2B vss 13.4B
EUR ZEW 31.5 vs. 12.2

North America:
CAD Retail Sales 8:30
USD Existing Homes 10:00

Rollercoaster night of trade in the FX market with both EUR/USD and USD/JPY going on wild rides both up and down as rumors, news events and surprising economic data all combined to create a particular volatile session wreaking havoc on both bulls and bears. In Japan the BOJ as expected confirmed that it will target 2% inflation and will begin unlimited QE to support its policy goal.

USD/JPY initially rallied on the news but then sunk like a stone falling nearly 200 pips off the highs as profit taking kicked in. Part of the reason for such a sharp selloff was the classic buy the rumor, sell the news dynamic as everyone had positioned long in front of the event only to be caught flat footed when the pair could not clear the recent highs. However, as some analysts has pointed out, the selloff in USD/JPY was also prompted by the fact that the BOJ announcement was far less aggressive than expected.

Although the BOJ did commit to a 2% target it left the date open ended thus relieving the pressure on monetary authorities to act immediately. Furthermore its QE initiative is not slated to start until January 2014 and is skewed to the short end of the curve which is less likely to raise inflation expectations.As we pointed out yesterday the presser was vulnerable to being “long on rhetoric but short on policy action”, and today’s market reaction appears to confirm that thesis. In short the BOJ basically provided a classic Japanese example of saying yes, but meaning no.

Having failed at the 90.00 level three times now, USD/JPY may be destined for a steeper correction towards the 88.00 figure. Any further upside is now more likely to come from US economic data rather than Japanese policy action with today’s Existing Homes sales offering some possible support to upside. However, the trend now clearly favors the downside and only a rally through the 90.25 highs puts bias back to the upside.

Meanwhile all the excitement was not contained to the yen as the euro saw some drama of its own. The pair took a hit early on rumors that the arch hawk Weidemann was leaving the ECB and it fell through recent lows to 1.3265. However, the selloff was quickly reversed as BUBA quickly squashed the speculation as “utter garbage”. The pair then recovered its footing and soared higher on a very strong ZEW number which printed at 31.5 versus 12.2 eyed.

This was the second month in a row that German sentiment improved considerably suggesting that growth in Europe’s biggest economy may be reviving. However, the ZEW survey which is a poll mainly of investment professionals tends to be skewed by financial market performance and the upcoming IFO report which deals with the business sector should be a more accurate gage of economic activity.

Meanwhile the news definitely had a palliative effect on the EUR/USD but the pair remains hemmed in by the 1.3400 level to the upside. If risk flows extend into North American trade it may make another run at that target as the day proceeds,

Boris Schlossberg
Managing Director

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