Risk Off Kneecaps USD/JPY – But Dollar Bulls Still Have Hope

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Market Drivers Feb. 8, 2016

USD/JPY unwinds NFP gains
CNY reserves a bit higher
Nikkei 1.10% Eurostoxx -2.36%
Oil $30.50/bbl
Gold $1172/oz

Europe and Asia:
JPY Eco Watcher Survey 46.6 vs. 48.5
EUR Sentix 6,0 vs. 7.2

North America:
CAD Building Permits 8:30

European equity bourses took a nasty tumble at the start of week;s trade dropping more than -2% dragging risk currencies lower after a strong open in Asia.

The Asia session generally saw a better tone with Nikkei rising by more than 1% after data over the weekend revealed that Chinese FX reserves did not fall by as much as market feared coming in at 3.23 Trillion dollars versus 3,21 Trillion eyed. Still this was a near 100 billion dollar drop from the month prior and put the figure at its lowest reading since March of 2012.

The pace of reserve declines is a clear concern to investors who fear that China may be forced to devalue the yuan as it continues to battle capital flight. Ironically enough, as some analysts have pointed out, the yuan has actually risen against the pound, euro and commdollars in 2015 and it would be a far better course of action for Chinese authorities to let the unit float and decline naturally, but they fear that if they step away from the market it will create a panic move and allow hedge funds to push the unit sharply lower. In short the Chinese policymakers most likely would like to see a lower yuan but only on their own terms and that may not be possible.

In the meantime markets remains skittish and every equity rally remains a sell which in turn drag risk FX lower as well. USD/JPY which popped to a high of 117.50 in Asian session trade quickly gave up all it gains and hit a low of 116.62 before finding a modicum of support in Europe.

Friday’s NFPs, though lower than expected actually contained some positive news as wage growth rose by 0.5% – its best pace in more than 8 years. Wage growth is the key variable that the Fed looks at in determining its normalization policy and Friday’s results left a small ray of hope for dollars bulls that the Fed may still be willing to hike rates in March. However such a scenario is only possible if global capital markets begin to stabilize and US labor conditions remain robust.

With no major data on the calendar today and with many of the markets in Asia closed for Chinese New Year, trade today in North American session may remain sedate unless equities begin to slide which could push USD/JPY to a test of 116.50 and possibly even the 116.00 level. As we’ve noted earlier the pair has held that level more than 5 times over past few years and support at that figure will be crucial and won’t likely be tested seriously until the market gest to hear Ms. Yellen’s testimony to Congress this Wednesday.

Boris Schlossberg
Managing Director

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