North American Close – All Eyes on Japan

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Market Drivers for July 19, 2013
G20 Offers nothing new – no discussion of BOJ yet
Markets await Japanese election over the weekend
China liberalization of lending has very little impact
Dow -0.07% Nikkei -1.48% Europe -0.07%
Oil $108/bbl
Gold $1293/oz.

Europe and Asia:
JPY All Industry Activity Index 1.1% vs. 1.3%
NZD Credit Card Spending 5.4% vs. 2.5%
GBP Public Sector Net Borrowing 10.2 vs. 9.4

North America:
CAD CPI 8:30 1.3%

A thoroughly uneventful day in forex as traders were clearly more concerned with the sweltering temperature outside their offices rather than the lackluster price action on their screens. With dog days of summer fully upon us, the economic calendar offered no support as the data docket was essentially barren. In UK the PSNB improved from the month prior but not as much as expected coming at 10.2B versus 9.4B eyed. In Canada the CPI remained tame at 1.3% and neither release had any impact on trade today.

The one newswire surprise was the announcement by the PBOC that the Chinese central bank was removing the floor on lending rates. Initially the liberalization move had a positive impact on high beta FX with Aussie running up 40 points in the aftermath of the news. But the enthusiasm quickly faded as traders realized that the impact of the PBOC announcement is likely to be minimal.

The markets are much more concerned with the macro state of affairs in China, as traders continue to worry about the prospect of a hard landing in the Middle Kingdom. A recent report that showed housing costs in China’s top 3 cities to exceed even the most expensive OECD centers like London and Tokyo and New York, has many market observers highly concerned about the possibly of a bursting of the real estate bubble which could have disastrous consequences for the region and for the global economy as a whole.

In the near term, next week focus will be on the HSBC Flash Manufacturing PMI report due Monday night. If the data continues to decline sinking further below the 50 boom/bust level, the Aussie could come in for more selling with shorts presisng the 9000 level once again.

Although this weekend the G-20 will meet in Moscow, the primary focus of the FX market remains on Japan where Prime Minister Shinzo Abe’s LDP party is expected to do well in parliamentary elections, but just how well remains an open question. In order to obtain an outright majority the LDP needs to win 72 seats, but the polls put the LDP at 65-66 seat rate which would mean that it would still have to govern in a coalition.

If the LDP is able to capture an outright majority of seats, USD/JPY could gap open higher on Sunday and possibly challenge the near term swing highs at the 101.50 level. If on the other hand the winning margin is more modest, USD/JPY could slip below the 100.00 mark on knee jerk profit taking.

What appears to clear, barring any sharp surprises in the outcome is that Mr. Abe is likely to consolidate his power and maintain course for an accommodative fiscal and monetary policy. That in turn should prove to be USD/JPY bullish unless the JGB market in Japan turns volatile once again.

Boris Schlossberg
Managing Director

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