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Earlier today the USDJPY broke significantly below 100 for the first time since its post-Brexit sell-off on 24th June. Back then the US dollar bounced back quickly and ended the day above 102. Less than a month later and the pair traded above 107. Of course, that was a period of volatility affecting all asset prices as investors had completely underestimated the possibility of the UK voting to leave the EU. Financial markets were mispriced and investors were forced to adjust to the unexpected result in a hurry.

But today’s sell-off comes against a different background. For a start, the decline in the USDJPY over the last few weeks has been orderly for the most part, although not without some sharp moves. The biggest of these came towards the end of July following the Bank of Japan’s (BOJ) last monetary policy meeting. The general expectation was that the BOJ would provide a significant dollop of monetary stimulus to complement the 28 trillion yen ($280 billion) fiscal stimulus promised by Prime Minister Shinzo Abe just a few days ahead of the meeting. Unfortunately for sellers of the yen both the BOJ and Mr Abe failed to deliver. The BOJ said it was boosting its ETF purchases to 6 trillion yen from 3.3 trillion per annum while doubling its lending to local companies. This was way short of the “shock and awe” programme that many investors had been hoping for. There was further disappointment when Mr Abe provided details of his fiscal stimulus package. Of the 28 trillion yen promised it appears there is just 7.5 trillion ($74 billion) of new spending, and only 4.6 trillion earmarked for this year.

This week’s yen rally comes on low holiday trading volumes and follows a disappointing reading for Japan’s second quarter GDP. This came in flat for the quarter - well below the first quarter’s +0.5% growth rate and the consensus expectation of an increase of 0.2%. There was also some downside pressure on the dollar following the release of a paper by San Francisco Fed President John Williams. This was particularly dovish as it suggested that the US’s “natural” interest rate is set to be lower for longer and that politicians must now support the central bank with fiscal stimulus.

After falling to within a few ticks of 99.50 earlier today the USDJPY suddenly shot back above 100 again. However, this wasn’t as a result of any intervention from Japanese policymakers. Instead it followed New York Fed President William Dudley’s claim that "the market is complacent about the need to gradually hike rates and the time for a rate hike is edging closer." So, those Fed heads are at it again, desperate to convince investors that the September meeting is still “live” in that it could be the forum to announce monetary tightening. That really doesn’t seem likely. The US data isn’t robust enough and it’s unlikely the Fed would risk a rate hike so close to the Presidential Election. In the meantime, tomorrow evening sees the release of the minutes of the Fed’s July meeting. So we can expect the USDJPY pair to remain volatile.

David: After falling to within a few ticks of 99.50 earlier today the USDJPY suddenly shot back above 100 again.

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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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