Why Has USD/JPY Collapsed So Swiftly

Posted on

Market Drivers for June 13, 2013
USD/JPY slips through 94.00 as Nikkei slumps -6%
Australian labor data mixed
Nikkei -6.35% Europe -1.67%
Oil $95/bbl
Gold $1389/oz.

Europe and Asia:
AUD Unemployment Rate 5.5%
AUD Unemployment Change 1.1K vs. -9.8K
AUD Full Time Employment Change
AUD Consumer Inflation Expectations 2.3%
NZD RBNZ Rate Decision no change
CHF Producer & Import Prices -0.3% vs. 0.1%
EUR ECB Publishes Monthly Report

North America:
USD Advance Retail Sales 8:30
USD Retail Sales Less Autos 8:30
USD Initial Jobless Claims 8:30
USD Business Inventories 10:00
CAD New Housing Price Index 8:30

Another harrowing day of USD/JPY liquidation in Asia as the pair tumbled all the way below the 94.00 level in the wake of -6.35% decline in the Nikkei. The drop in the Nikkei has sent risk aversion flows reverberating through all the capital markets as the index is now fully -20% off its highs and in official bear market territory.

Japanese Cabinet Secretary Suga tried to shrug off the recent volatility in the markets noting that is simply the result of profit taking by investors, but the turbulence in equities has clearly made its way to FX with USD/JPY now nearly 10 big figures off its recent highs.

The decline in the pair has been stunning in its strength and swiftness and may now have negative repercussions for Japanese growth as exporters must quickly adjust to the appreciating yen. Although there are probably many factors behind today’s collapse, including the liquidation of some long term positions as the key 95.00 barrier was broken, the primary factor behind this week’s selloff in USD/JPY is investor disappointment as Japanese policy initiatives appear to have stalled.

This week’s BOJ meeting, which offered no new policy initiatives or stimulus programs was the catalyst for the rapid change in sentiment in the FX market. Mr. Kuroda simply repeated the well known policy points of the new regime and that gradualist message resonated very badly with the market which was looking for more dramatic actions on the monetary and fiscal fronts.

However, Japanese policy officials are struggling with the volatility in the fixed income market and may not be able to act as aggressively as they like. As many analysts have pointed out with the country’s extremely high debt to GDP ratio, any spike in yields presents massive fiscal challenges to the current government and limits its ability to reflate the economy to its 2% target.

That’s why any help for USD/JPY longs is likely to come from this side of the Pacific, as Japanese policy choices become restricted. If US economic data can show some accelerating growth then the rise in US Treasury yields should translate into higher USD/JPY rates as traders begin to price in the tapering of QE.

To that end today’s US Retail Sales data may serve as the make or break point for USD/JPY pair as the day proceeds. If the data can show a robust rebound in US consumer demand, then USD/JPY may be able to recover much of its losses and trade back towards the 95.00 level
as short covering kicks in. If on the other hand, US Retail numbers disappoint, the report could usher in another wave of selling that could push the pair below the 93.00 level as cascading stop losses trigger panic selling.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *