Yen Seesaws As Australian Hostage Drama Unfolds

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Market Drivers December 15, 2014

Abe wins a landslide but USD/JPY sold on news
Tankan comes out mixed
Nikkei -1.57% Europe 0.61%
Oil $58/bbl
Gold $1214/oz.

Europe and Asia:
JPY Tankan Manufacturing 12 vs. 13
JPY Tankan Non-Manufacturing 16 vs. 14
AUD MYEFO expands deficit projection to -40B AUD

North America:
USD Empire Manufacturing 8:30

It’s been a very choppy night of trade on the first trading day of the week as markets were pushed and pulled by a variety of economic and geopolitical factors including an ongoing terror hostage situation in Sydney, with the dollar getting progressively more bid as the European session wore on.

In Asia USD/JPY opened to a rollercoaster ride at it first rose in response to PM Abe’s sweeping victory over the weekend only to fall on a mixed Tankan report and then rally once again towards the 119.00 level in mid morning London trade.

The Tankan report showed that sentiment in the Manufacturing sector continues to sink as it dropped to 12 from 13 forecast but the services component improved markedly rising to 16 from 14 eyed. It remains to be seen if Mr.Abe can succeed in implementing his reforms, but he certainly now enjoys a sizable lead in the Japanese Parliament that should provide him with ample room to enact legislative change.

The price action in USD/JPY meanwhile remains volatile but contained to the 120.00-118.00 corridor and is likely to remain at these levels until Wednesday’s FOMC meeting. The FOMC is going to be crucial to setting the tone in dollar trade for the rest of the year. If Chairwoman Yellen indicates that the Fed is ready to begin normalizing policy by Q1 of 2015 USD/JPY could easily move to fresh yearly highs through the 122.00 barrier. But if the Fed remains non committal a sharper correction could begin that could send the pair back towards the 115.00 barrier.

Meanwhile in Australia, a very tense situation all night long as a lone gunman took multiple hostages at a Sydney cafe in what is believed to be a terrorist action. Authorities have been patiently negotiating the situation but the city remains on high alert and could turn tragic at any time. The Aussie tumbled in initial reaction to the news stopping just ahead of the 8200 barrier but then slowly rose as the night wore 8250.

The euro and cable on the other hand slid throughout the night with EUR/USD moving towards the 1.2400 level while cable broke 1.5700 and inched towards 1.5650. The move towards the dollar was likely a safe harbor flow as markets kept a wary eye on Sydney as well as new possible hostage situation developing in Belgium.

The North American session holds only Empire Manufacturing on the docket, but its unlikely to have much of an impact on trade. The markets will no doubt continue to follow the developments in Australia and a tone of risk aversion could continue for the rest of the day.

Boris Schlossberg
Managing Director

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