USD/JPY Gaps Above 107.00 But Rally Stalls in Europe

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Market Drivers for October 20 2014

Japan’s GPIF intends to buy more Japanese stocks Nikkei soars pushing USD/JPY through 107.00

Fed’s Williams -Fed should end QE

Nikkei 3.98% Europe -1.07%

Oil $82/bbl

Gold $1241/oz.

Europe and Asia:

NZD PMI Services 58 vs. 57.7
NZD Consumer Confidence 123.4 vs. 127.7
EUR German PPI -1.0% vs. -1.0%

North America:

CAD Wholesale Sales 08:30

The Nikkei soared closing nearly 4% higher on the first day of the trading week after the Japanese Government Pension Investment Fund announced that it will increase its allocation to domestic equities from 17% to 25%. The change is expected to spur buying of up to 8 Trillion yen of Japanese shares and was seen as major positive by investors in Asia. Japanese Prime Minister Abe also suggested that he may delaye the second sales tax increase adding fuel to already positive investor sentiment.

The rally in Asian equities helped push USD/JPY through the 107.00 figure with the pair topping out at 107.36 but the European equities failed to follow through with Eurostoxx 100 trading lower by more that -1% and that cause the rally in yen crosses to stall in mid -morning London dealing.

With absolutely no economic data on the docket today risk flows are likely to dominate trade for the rest of the day with prices likely to consolidate in relatively narrow ranges after last week’s massive volatility moves. There is still very little clarity as to the direction of monetary policy or economic performance in G-7 universe as markets try to ascertain whether the current slowdown in activity is foreshadowing of a possible recession or simply a temporary stall caused by the recent geopolitical shocks.

This week the data from both Asia and Europe may be key to answering that question as traders will focus on the deluge of economic releases from China tomorrow and the flash PMI readings from EZ on Thursday. The Chinese data will be of particular importance to the market as traders will focus on the GDP growth. GDP is expected to slow to 7.2% from 7.5% the period prior, but if the number slips below the psychologically key 7.0% level it could send shock waves through the market as traders will fear that the global slowdown has spread from EZ to China and will therefore affect two out of the three key regions of the world.

Meanwhile in Europe the flash PMI reading will provide the latest readings of conditions on the ground and markets will be keen to see some signs of stabilization in demand which has been trending lower for the past quarter. With ECB officials still engaged in a debate as to size and scope of stimulus, the EZ economy continues to be the main drag on global growth and until it shows some signs of life, risk aversion flows are likely to continue to roil markets into the year end.

Boris Schlossberg
Managing Director

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