Vantage FX | BoJ ramps USDJPY higher, Aussie dollar sold heavily – what gives? | 5th April 2013

April 5, 2013

Central bank action and inaction drove some solid moves on Global FX markets overnight with some very large moves in the USDJPY and Yen crosses as well as  a late reversal from Euro and Sterling. The Aussie had a shocker proving there’s more to trading currencies than just a look at the data with it hitting a low more than 100 points off yesterday’s high this morning before it too staged a late recovery.

On stock markets Europe was under pressure from the weak non-manufacturing PMI’s and the lack move from the ECB even though ECB President Mario Draghi pointed out the grim economic outlook for the zone and reiterated that rates would stay low for as long as it takes. Clearly he was trying to echo his “whatever it takes” impact in the Sovereign crisis last year but clearly this is different and action not words are required to fix the mess that is the European economy.

At the close in Europe the FTSE fell 1.19%, the CAC 0.77%, DAX 0.73% and Spain fell 0.71%. Somehow Milan managed to only fall 0.30%. In the US things were a little better with the rally around 1 pm their time lifting markets off their lows and seeing the Dow close +0.38%, the Nasdaq rose 0.20% and the S&P 500 rose 6 points to 1560.

Of note in the US was the weaker than expected jobless claims which showed and unexpected uptick both at the weekly level, which rose 28,000 to 385,000 and continuing claims although down from last week were up against expectations.

The BoJ didn’t muck around yesterday afternoon with a unanimous vote behind new Governor Kuroda to double the size of its balance sheet over the next 2 years as it aims to get to a 2% inflation rate. It is going to do this by purchasing long term bonds and the big announcement was really a paradigm shift in the approach of the BoJ to the intractable economic malaise that Japan has been in for years now.

Indeed Kuroda said,

We can’t escape deflation with the incremental approach that’s been taken until now, We need to use every means available…

I am confident that all the policies we need to achieve 2 per cent inflation in around two years are now in place

Predictably USDJPY fairly roared higher and the Nikkei also spiked rising 2.21% against falls on the rest of Asia’s major bourses.

As you can see in the chart above the breach of the little 4 hour trendline opened the move to the next line around 94.85 but USDJPY kept roaring higher to print 96.41 before pulling back to 96.16 at the moment. That is a move of 3.34% on the day which for an FX move is just huge and clearly you can see in the price action a lot of people were caught short but equally there were simply a lack of sellers once the move gained momentum.

From a longer term perspective and in the context of the recent high the important point is that USDJPY has not, as yet, taken out the high of the move from 79ish at 96.75/80. If it did then this would open up further topside given the recent pullback but while below this level we respect it as a high of note. Indeed as you can see on the chart above we got short this morning and are looking for a pullback.

I will write a separate post later about the folly of a simple focus on data as anything other than a short term trading catalyst after I saw some comments on twitter yesterday that the Aussie’s price was not “appropriate” – this is a term that has no place for traders indeed almost anyone except perhaps unless spoken by a central bank in context of the macro settings of an economy. Either way the retail sales data was strong yesterday and the building approvals on the face of it looked solid as well although the raw number masked the “public” rather than “private” nature of the uptick.

In the aftermath of the data the Aussie traded up to a high of 1.0486 but came under pressure as Europe entered the fray back to the 1.0450 region where it was before the data and then pushed down through the previous days low at 1.0445 where the sell off accelerated. The Aussie made a low around 3am this morning at 1.0383 and we closed a short at 1.0388. After the low though the Aussie fairly roared along with the Euro’s late charge, apparently on some pro-Euro co-ordination comments from ECB member Coere, to a high of 1.0453 and it now sits at 1.0432 this morning.

As you can see in the chart above we’d say we have a broad box between 1.0380 and 1.0500/15 and unless or until one of those extremes goes the Aussie is trading within this range.

On commodity markets gold was under pressure again trading down to a low around $1538 before rebounding to $1553 for a small loss on the day. Silver was equally unchanged around 7am Sydney time this morning at $26.81 oz. Crude also sold off heavily and then rallied back but still managed to close down 1.25% this morning at $93.27 Bbl. Corn lost 1.91%, Wheat fell 0.57% and soybeans dropped 0.60%.

Data

Non-farm payrolls is pretty much the only thing that matters on the data front into the week’s end although European retail sales and German factory orders will also be important.

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