Market Drivers November 18, 2014

Abe expected to announce snap elections and delay of tax hike. USD/JPY above 116.50
GE ZEW 11 vs. .09 sends EURUSD to 1.2500

Nikkei 2.18% Europe .52%

Oil $75/bbl

Gold $1197/oz.

Europe and Asia:
AUD RBA Minutes offer nothing new
GBP UK CPI 1.2% vs. 1.2%
EUR ZEW 11.5 vs. 0.9

North America:
USD PPI 08:30

Today, Japan’s Prime Minister Abe confirmed long simmering rumors that he will delay the second increase in the sales tax hike by 18 months and will dissolve the lower house of the Parliament seeking political support for his broad based agenda of economic reform.

USD/JPY rallied briefly towards the 117.00 level but quickly sold off when Mr.Abe started to make his remarks as market players were anticipating further policy moves to stimulate Japan’s moribund economy. Instead Mr. Abe acknowledged that the current economic climate was challenging but noted that his three pronged approach towards reform was beginning to work. He also reaffirmed his commitment to the second tax hike making a promise that there will be no further delays beyond the 18 month extension.

In speaking Mr. Abe continued to focus on consumer demand which he considers critical to the health of the Japanese economy and is the primary reason for his delay of the tax hike. Mr. Abe focus on aggregate demand also represents a significant shift in Japanese policymakers focus of driving growth through consumption rather than production.

Whether Mr. Abe succeeds in his efforts to jumpstart the economy remains to be seen, but lower energy costs and lower yen should spur demand in Q4 of this year and help GDP turn positive once again. Meanwhile Mr, Abe and his allies will go to the polls and while the market is generally complacent about his chances to retain and even consolidate his power, there is a risk that Japanese public opinion may not be as favorable. He has promised to resign if the coalition does not keep its majority in Japanese parliament. While such a scenario remains a long shot it nevertheless could create massive volatility in USD/JPY if the polls begin to show a softening of support for his party.

Elsewhere, the EUR/USD recaptured the 1.2500 level in the wake of better than expected ZEW data which printed at 11.5 versus 0.9 eyed. This was the best reading in four months and may be a sign that conditions in the EZ are beginning to stabilize after several brutal months of geopolitical shocks. The key report however will be Thursday’s flash PMI readings which will provide the latest snapshot of the conditions on the ground.

In North America today, the focus will be on US PPI data with market looking for core to uptick to 0.2% from 0.0%. Any upward surprise would be a welcome boost to dollar bulls and could push USD/JPY towards the 117.00 level again while taking EUR/USD below 1.2500, but if the data remains muted it could spur a further correction in the dollar rally.

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