Another cavernous decline in the Nikkei caused the USDJPY to plummet all the way below the 94.00 level in today’s Asian session, and the pair may now sell off further following the US retail sales report.
Another harrowing bout of USDJPY liquidation has unfolded in Asia overnight and the pair tumbled all the way below the 94.00 level in the wake of a -6.35% decline in the Nikkei. This latest drop in the Nikkei has sent risk-aversion flows reverberating through the capital markets, and with the Nikkei now fully 20% off its highs, it’s officially in bear-market territory.
Japanese Cabinet Secretary Yoshihide Suga tried to shrug off the recent volatility in the markets, saying that it is simply the result of profit taking by investors, but the turbulence in equities has clearly made its way to FX with USDJPY now nearly ten full figures off its recent highs.
The decline in USDJPY has been stunning in its strength and swiftness, and it may now have negative repercussions for Japanese growth because exporters must quickly adjust to the appreciating Japanese yen (JPY).
Although there are probably many factors behind today's collapse, including the liquidation of some long-term positions once the key 95.00 barrier was broken, the primary factor behind this week's USDJPY selloff is investor disappointment now that Japanese policy initiatives appear to have stalled.
This week's Bank of Japan (BoJ) meeting, which offered no new policy initiatives or stimulus programs, was the reason for the rapid change in FX sentiment. BoJ Governor Haruhiko Kuroda simply repeated the well-known policy points of the new regime, and that gradualist message resonated very badly with the market, which was looking for more dramatic actions on the monetary and fiscal fronts.
However, Japanese policy officials are struggling with the volatility in the fixed-income market and may not be able to act as aggressively as they like. As many analysts have pointed out, with the country's extremely high debt-to-GDP ratio, any spike in yields presents massive fiscal challenges to the current government and limits its ability to reflate the economy to its 2% target.
That's why any help for USDJPY longs is likely to come from the US side of the Pacific while Japanese policy choices become restricted. If US economic data can show some accelerating growth, then the rise in US Treasury yields should translate into higher USDJPY rates as traders begin to price in the Fed’s likely tapering of quantitative easing (QE) measures.
To that end, today's US retail sales data may serve as the make-or-break event for USDJPY. If the data can show a robust rebound in US consumer demand, then USDJPY may be able to recover much of the losses and trade back towards the 95.00 level as short covering kicks in.
If, on the other hand, US retail data disappoints, the report could usher in another wave of selling that could push the pair below the 93.00 level as cascading stop losses trigger panic selling.
See also: This Week’s Biggest US Dollar Driver
By Boris Schlossberg of BK Asset Management