Can USD/JPY Break 103.00?

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Market Drivers for May 16, 2013
Japanese GDP beats helping to lift USD/JPY through 102.50
AUD/USD slips through 98.50
Nikkei -0.39% Europe -0.18%
Oil $93.50/bbl
Gold $1370/oz.

Europe and Asia:
JPY GDP 0.9% vs. 0.7%
JPY Industrial Production 0.9% vs. 0.2%
EZ Trade 18.7B vs. 11.8B

North America:
USD CPI 8:30
USD Initial Jobless Claims 8:30
USD Housing Starts 8:30
USD Building Permits 8:30
USD Philly Fed 10:00

A very quiet night of trade in the FX market with most of the majors staying within relatively tight ranges amidst little newsflow, but the one exception to that rule was the Aussie which hit fresh 3 month lows today as the liquidation in the pair continues unabated. There was no fresh news out of Australia, but the AUD/USD tumbled through the 98.50 support level stopping just shy of 98.00 before stabilizing a bit.

The pair was hurt by the continuing slide in precious metals as gold dropped below $1400/oz again trading at $1370/oz. in mid morning London session. The collapse of the Aussie has been unrelenting this month with the pair falling for 10 out of the past 12 trading days. However now that it is coming into longer term support in the 9700-9800 region the pair is likely to stabilize as longer term investors step in to pick it up below par attracted by its G20 leading yield.

Still the price action in the pair has been horrid as “short Aussie” has become the most obvious idea in the currency market with many large hedge funds piling into the trade. Investors expect the RBA to continue to lower rates as the economy Down Under slows down both from curbing of commodity related investment projects and decline of exports to Japan – its second largest market – as yen depreciation weighs on trade.

Yet it is not clear if the Australian economy will indeed seriously suffer from these trends. The latest labor market data showed a surprising resilience and flexibility as growth shifted from mining related jobs to the service industry. Therefore the prospect of further RBA rate cuts remains an open question and if the central does not ease further the Aussie could see a relief bounce over the next few weeks.

Meanwhile in Japan the GDP data suprised to the upside printing at 0.9% vs. 0.2% with news encouraging investors that Abenomics is starting to work. Japan’s Industrial production also perked up as demand is clearly expanding in the wake of highly stimulative policies by the BOJ. USD/JPY rose back above the 102.50 level as currency markets were encouraged by the news and the pair could target the key 103.00 figure if US flows prove supportive in North American session.

US calendar carries a slew of second tier releases with jobless claims, Philly fed, CPI and housing starts all on the docket. Market is looking for slightly worse data across the board with Philly report the only exception. A batch of misses could once again frustrate the USD/JPY bulls keeping the pair capped ahead of 103.00 handle, but if the data surprises to the upside, especially on the weekly jobless claims report the pair’s rally is likely to take out that key level as the day proceeds.

Boris Schlossberg
Managing Director

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