What Can BOJ Do?

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Market Drivers Feb. 12, 2016

Risk flows improve USD/JPY settles
EU IP misses
Nikkei -4.84% Eurostoxx 1.76%
Oil $27/bbl
Gold $1237/oz

Europe and Asia:
GBP Construction Output 1.5% vs. 2.1%
EU GBP 0.3% vs. 0.3%
EU IP -1.0% vs. 0.3%

North America:
USD Retail Sales 8:30
USD U of M 09:55

It’s been a decidedly calmer session in currency market tonight with risk flows improving especially in Europe which has helped to stabilize USD/JPY at the 112.00 level.

The open of Asia brought yet more selling in the pair as the NIkkei dropped by more than -5% adjusting to global equity movements after being on holiday. USD/JPY promptly followed dropping through the 112..00 figure, but the pair quickly found support and has traded steadily ever since.

Although market participants anticipate some policy action from BOJ in response to this week’s volatility, Japanese monetary authorities have been silent so far although Governor Kuroda and Prime Minister Abe discussed financial market moves in a meeting today.

Part of the reason for BOJ’s inaction may simply be the fear that any intervention in the market will be quickly unwound. Certainly that has been the story in the past as any weakening of the yen was quickly rejected by the market. BOJ may be considering more durable policy moves such as an expansion of QE in order to make the action stick.

Still with the limits of monetary policy essentially exhausted, there are few good options for Japanese authorities to choose from. Ultimately yen strength is driven by risk aversion flows as investors liquidate riskier financial assets. This year the move is likely to have been accelerated by many oil based sovereign wealth funds that are trying to liquefy in the face of growing cash flow needs at home.

In short there appears little that Japanese authorities can do to control the fate of their currency as macro factors will dominate its direction for the foreseeable future. That having been said, the risk selloff in global markets appears to be overdone and any bounce in equities could provide an excuse for short covering rally in USD/JPY to the 115.00 level, but first it will likely need to stabilize for a few days after all of the turbulence this week.

In North American trade the market will get a glimpse of US Retail Sales data and the U of MI readings. Expectations are subdued for both readings any miss would likely trigger yet more risk liquidation ahead of the weekend. However of the numbers surprise to the upside they may suggest that better labor data is finally starting to translate into higher spending and that realization could extend this morning’s rally in risk.

Boris Schlossberg
Managing Director

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