USD/JPY Breaks 93.50 – Fresh Lows in View?

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Market Drivers April 1, 2013
Nikkei drops -2% takes USD/JPY through 93.50
Europe still closed for Easter holiday
Nikkei -2.12%
Oil $96.75/bbl
Gold $1596/oz.

Europe and Asia:
JPY Tankan Large Manufacturers Outlook -8 vs. -7
JPY Tankan Non-Manufacturing Outlook 6 vs. 8
JPY Tankan Large All Industry Capex -2.0% vs. 5.0%
CNY PMI 50.9 vs. 51.6
CNY PMI HSBC 51.6 vs. 51.7

North America:
USD Markit US PMI Final 9:00
USD Construction Spending 10:00
USD ISM Manufacturing 10:00

The currency markets were very quiet once again as most of Europe and parts of Asia remained closed for the Easter holiday, but USD/JPY found some action in early European trade dropping through the key 93.50 support level before finally finding some bids. Overnight the Nikkei dropped by more than -2% after weaker than expected Tankan survey results created a downcast mood amongst Japanese investors who saw little evidence that policies of newly elected Prime Minister Shinzo Abe were making any difference to the Japanese economy.

The Tankan showed that the manufacturing index improved to -8 from -12 the period prior but lower the -7 reading expected by the market. However, perhaps most shocking of all were the disappointing numbers regarding future Capex spending. The market had expected an increase of 5% but the Tankan showed that companies actually planned to reduce capex by -2%.

The Tankan survey data shows that despite Mr. Abe’s attempts to stimulate the Japanese economy, the road to recovery will be slow and torturous as Japanese businesses face not only competitive pressures from China and South Korea but continued consumer resistance to their products in China due to the political tensions between the two countries.

Therefore aggregate demand in Japan is likely to remain anemic for the time being, with deflation still dominating the economy. That’s why this week’s BOJ meeting looms so large in the market’s eye as currency traders look for a dramatic expansion of the QE program. If the BOJ proves guarded and conservative in its actions, making only incremental changes to the program USD/JPY is likely to slide further and may retest the 91.00 lows set during the sharp selloff at the start of February.

Meanwhile, trading resumes in North America today and the key event risk for the market will be the ISM Manufacturing report due at 1400 GMT. The market anticipates no change from the month prior, looking for a reading of 54.2 but given the fact that the Chicago PMI was markedly lower the prospect of downside miss is relatively strong. Weaker ISM data and the softness in Asian equity markets could set up a negative tone for today’s trade and could push USD/JPY towards a fresh test of the 93.00 support level as the day proceeds.

Boris Schlossberg
Managing Director

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