Risk FX Mildly Bid as Markets Awake to Sandy Damage

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Market Drivers October 30, 2012
BOJ Increases QE but USDJPY sells off
German unemployment rises for first time in 3 years
Nikkei – .98% Europe 0.68%
Oil $85.27/bbl
Gold $1713/oz.

Europe and Asia:
JPY BOJ QE 10T yen
EUR German unemployment 20K vs. 10K

North America:

USD data postponed due to Sandy

Risk FX saw a mild rally in early morning European trade boosted by better equity flows while USD/JPY dove through the 79.50 level in the wake of BOJ announcement on QE that disappointed the markets. USD/JPY tripped stops all way to 79.30 after BOJ increased its QE program by 11 trillion yen as expected, with many traders hoping that Japanese monetary officials would deliver a bigger boost. The BOJ announced it would expand its program from 80 trillion to 90 trillion yen with a program that would include purchase of T-bills government bonds and a small slice that would be allocated to riskier assets such as ETFs. The purchase program will be

Although the 10 trillion expansion of QE is a significant move by the BOJ, it was well anticipated by the market after the Nikkei newspaper leaked the details last week. Therefore today’s announcement was highly anti-crolimactic creating a classic sell the news dynamic. Some speculators in the market were anticipating an expansion of QE to 20 trillion or more and today’s action was viewed as too little too late.

The action of the BOJ was particularly paltry in view of the developments in the US where tropical storm Sandy wreaked massive economic havoc on the Eastern seaboard that may force the Fed to inject yet more liquidity into the financial system as US capital markets attempt to recover from one of the biggest natural disasters in recent memory. The Japanese officials therefore remain hopelessly behind the curve as their best laid plans at stimulus are overtaken by events across the globe and the yen remains unnaturally strong frustrating their efforts to stimulate the country’s export sector.

For now USD/JPY has managed to hold above the 79.00 figure but if risk aversion flows accelerate as the week progresses, the pair faces the risk of breaking that key support and fully unwinding its recent rally.

Meanwhile in Europe German unemployment printed below forecast rising by 20K versus 10K eyed while the unemployment rate rose to 6.9% – its first gain in 3 years. The news on the labor front clearly shows that the slowdown in the periphery is slowly seeping its way to the core and could weaken Germany further if the sovereign debt situation remains unresolved. For now the markets continue to trade in a cautious state of equilibrium as EUR/USD churns between 1.3000-1.2900.

In North America today the focus will be on assessing the damage from Hurricane Sandy which devastated the financial district and much of downtown New York last night. Officials remain optimistic about the opening of NYSE tomorrow but much will depend of the state of damage to the transportation infrastructure which at first report appears to be extremely serious. For now the volatility remains compressed but as daylight breaks in New York and more news begins to circulate, FX may respond accordingly.

Boris Schlossberg
Managing Director

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