Has USD/JPY Topped Out?

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Market Drivers for April 26, 2013
BOJ stays pat, sending USD/JPY to 98.50
EUR/USD drifts lower as risk off sentiment dominates
Europe -1.13% Nikkei 0.3%
Oil $92.91/bbl
Gold $1460/oz.

Europe and Asia:
JPY National CPI -0.5% vs. -0.4%
JPY BOJ to Hold Policy Meeting and Release Outlook Report
CHF KOF Swiss Leading Indicator 1.02 vs. .98

North America:
USD GDP 8:30
USD Core Personal Consumption Expenditure 8:30
USD U. of Michigan Confidence 9:55

A very quiet night of trade in the forex market with most major pairs simply treading water in narrow ranges as the absence of eco data and fresh newsflow has produced very little movement in the European session. The one exception was USD/JPY which weakened materially after BOJ disappointed investors as it offered no fresh policy initiatives to stimulate the economy.

In its six month review the BOJ provided a balanced analysis noting that there upside and downside risks to the current policy of aggressive monetary easing. The BOJ noted that long term rates may rise if investor confidence in the country’s fiscal finances wanes but stated that there were no signs that the current policy was causing excessively bullish expectations in the assets markets.

Overall, the BOJ remained relatively upbeat that the new policy initiatives will result in faster GDP growth and will spur inflation towards the 1.9% level by 2015 helping a rise in nominal wages. The real economic data however, continues to show that deflation remains a nagging problem for the Japanese economy with core CPI figure printing at -0.5% versus -0.4% eyed.

The economic news suggests that the new highly aggressive monetary policies are yet to take hold as demand remains subdued. Given that background traders were disappointed with the statement by BOJ Chief Kuroda that committee did not consider any additional measures at today’s meeting. USD/JPY fell in reaction dropping to a low of 98.22 before rebounding slightly.

With USD/JPY now a considerable distance away from the the 100.00 mark the enthusiasm of the bulls who had been hoping for a run through that barrier is starting to weaken by the minute. The combination of disappointing US economic performance and lack of any additional policy initiatives by the Japanese has put a cap on the current rally and if today’s US GDP data disappoints it may send the USD/JPY pair to a test of the 98.00 level as the day proceeds.

Meanwhile the EUR/USD continues to be weighed by speculation of an interest rate cut at the upcoming meeting in May. The move may provide a knee jerk reaction lower, but ultimately may prove to be positive for the pair if it helps to stimulate the region’s moribund economy. For now however the EUR/USD continues to feel the downward pressure and may slip below the 1.3000 level in North American trade if risk off sentiment gathers steam.

Boris Schlossberg
Managing Director

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