USD/JPY Collapses on Kuroda Comments

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Market Drivers June 10, 2015

Kuroda sends USD/JPY plunging saying yen is weak enough
EUR – Greece and EU remain at loggerheads
Nikkei -0.25% Europe 0.04%
Oil $61/bbl
Gold $1183/oz.

Europe and Asia:
AUD Stevens tries to jawbone the Aussie
GBP UK IP 0.4% vs. 0.1%

North America:
No Data
NZD RBNZ Decision 17:00

It’s been a wild and turbulent night of trade in the currency market with USD/JPY collapsing for more than 200 points in Asian and early European trade after BOJ Governor Kuroda said that “ it is hard to see the yen’s real effective exchange rate falling further.” BoJ member Takehiro Sato added that it is “desirable for foreign exchange to reflect the real economy”.

The flurry of rhetoric from Japanese monetary officials caught the market completely off guard and send waves of selling in USD/JPY taking the pair to a low of 122.50 before it found a modicum of support.

Its difficult to ascertain as to exactly why the Japanese authorities felt it necessary to talk up the yen, but clearly the 125.00 level appears to be a concern for BOJ policymakers and the wanted to guide the pair lower for the time being. Perhaps the BOJ members were becoming concerned about the potential upheaval in the JGB market should yen weaken further. Certainly the volatility in European fixed income markets must have informed their decision as they tried to preempt similar type of turmoil in their own credit markets.

Although Japanese officials argued that the USD/JPY pair is fairly valued and that any potential rate hike is already factored into the exchange rate, it’s hard to see how that can be true. The currency markets remain in doubt as to the timing of the Fed rate hike and if the US authorities were to actually make that policy choice USD/JPY is likely to rebound and set fresh highs as the consensus view would assume that the rate differential between USTs and JGBs would grow.

Today’s price action therefore should probably be viewed as profit taking within a long term uptrend as no amount of rhetoric will slow the dollar rally if the Fed does indeed move to normalize rates. The one exception to that scenario would be a slowdown in US growth that would delays all those expectations.

With no US data on the docket, US traders will likely look to fixed income markets for directional clues. If US rates begin to pick, a large part of the USD/JPY selloff could be reversed as the day proceeds.

Boris Schlossberg
Managing Director

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