Yen Soars Amid Stimulus Confusion and Doubts

The strength of the Japanese yen is the main development in the foreign
exchange market today
. It has gained nearly 1.5% as short-term participants
grow skeptical of the kind of stimulus that had driven the yen around7.5% lower
between July 8 and July 21’s six-week high.  The pendulum of market
sentiment has swung wildly. 

 One set of estimates had risen from JPY10 trillion to JPY30
trillion over that period.
  There was also the fascination with a
version of helicopter money by which the Japanese government would issue
non-marketable, perpetual, zero coupon bonds that the BOJ would buy through
newly created credits.  Despite the illegality of such a policy, some
observers seemed too hasty to shrug off
Kuroda’s assessment because it was made
in the middle of June.  

In our discussions of the fiscal stimulus, we have emphasized the
distinction between the inflated headline figure, puffed up by rolling up other
programs and commitments, and the fresh water figure, which the is the stripped
down new news.
  We read yesterday’s report that the stimulus was going
to be JPY6 trillion instead of JPY3 trillion to be referring to the fresh
water.  Today’s comment by Finance Minister Aso that the size of the
package, expected as early as next week, as not been decided yet only adds to
the uncertainty and confusion.   

The market seems less sure of what the BOJ will do at the end of this
  And even if one knew what the BOJ was going to do, there is not
much confidence in anticipating the yen’s direction.  We had thought there
was room for disappointment with the BOJ.  Of the three dimensions of its
current policy, the quantity of assets
being purchases, the quality of those
assets, and interest rates, we had thought
that increasing ETF purchases, and
perhaps some other risk assets, maybe the likely course.  

The dollar fell JPY104 in late-Asia before stabilizing.  The
20-day moving average is found just below
there, and the JPY103.75 corresponds to a
50% retracement of the bounce from JPY100 to JPY107.50.  The 61.8%
retracement is found near
JPY102.85.  Initial resistance is seen near JPY!05 now.  

Another feature of today’s foreign exchange market is the strength of the
Antipodean currencies.
  The New Zealand dollar is up almost as much as
the yen (~1.2%) and the Australian dollar (0.8%).  The strength of the
move is surprising given the fundamental outlook (both central banks likely to
cut interest rates next month) and positioning (speculators in the futures
long, especially the Australian dollar).  First thing tomorrow in Sydney,
Australia’s Q2 CPI will be reported. 
Barring a surprise, the report is seen as the last hurdle to a rate cut next
week.   And the market is even more convinced of an RBNZ cut later in the

The Australian dollar has been finding support near $0.7450 for the last
several sessions, which is also at the
intersection of a three-month uptrend.
  Its recent peak was about
$0.7675 on July 15.  The $0.7530 area that is probing in the European
morning corresponds to a 38.2% retracement of that decline.  The 50% mark
is $0.7560.    

In the heavier US dollar context, sterling has managed to recover from
the initial slide to $1.3060 on news that MPC member Weale, who last week
voiced some opposition to the dovish signals from Carney (and the minutes),
says the flash PMIs convinced him of the need for immediate monetary support.
Initial resistance is seen near $1.3160
and then $1.3220.  

Tomorrow’s first estimate of Q2 GDP may only be interesting in passing,
and despite some claims that the referendum was already having an impact in Q2,
the economy may have actually accelerated
a touch.
  More important may be Thursday’s house prices and business
survey.  Reports suggest prices of
residential real estate in the London area have fallen sharply over the past

The euro is firm today after testing the $1.0950 area yesterday, which
was the first session since early-March that the euro did not trade north of
  Today it is, but not by much.  It appeared to stall near
the lower end of a band of resistance that extends from $1.1030 to
$1.1060.    The news stream is light,
and the market is awaiting the stress test results at the end of the

The North American session features S&P
Case-Shiller house prices for May, which are expected to have ticked up
slightly and the June new home sales reports, where a small increase is
anticipated after a 6% fall in May.
  The first estimate of Q2
GDP  is out on July 29.  The Bloomberg median of 2.6% is a little
above the NY and Atlanta Feds’ GDP trackers.  Barring a shocking Fed hike
tomorrow, Q3 data is more important from a policy point of view than Q2
data.  The Richmond July manufacturing survey hardly has heft, though we
note that much stronger than expected recovery in the Dallas Fed manufacturing
index yesterday plays on ideas that the US belt is basing for recovery. 
Markit’s preliminary service PMI for July is also on tap, along with the
Conference Board’s measure of July‘s consumer confidence.


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