​The Trump administration has not yet formally deployed the long-awaited latest $200 billion in tariffs against China, but a new Wall Street Journal report indicates that Japan might be next on the agenda.
Article / 17 November 2014 at 8:55 GMT

FX Update: JPY knee jerks higher on weak Japan GDP

Head of FX Strategy / Saxo Bank
  • JPY strengthens on surprise Japanese GDP data 
  • We could see new EURJPY highs if market believes BoJ will stay accommodative
  • Tomorrow's UK CPI release could see final washout in GBP longs 

By John J Hardy 

The news shaking the currency market overnight was Japan’s Q3 GDP release, which saw one of the worst surprises on the record, showing markedly negative -0.4% quarter-on-quarter growth versus the +0.5% expected. 

Clearly, the April 1 sales tax hike hit the economy far harder than expected and this virtually guarantees that Japan's prime minister, Shinzō Abe, moves quickly to call for a delay to the planned hike for October of next year. 

The JPY strengthened on the news due to the knee-jerk implication for risk sentiment and Japanese equities. The key test for whether this reversal will continue to get any traction is how the JPY behaves when (almost a certainty) Abe mentions the call for new elections this week. It’s hard to see why the market buys JPY here – note the technical implications of EURJPY trading up above 145.00 as I pointed out on Friday. USDJPY key support is 115.50, with the overnight low close to that level. 


EURJPY pushed back a bit lower, but remains above 145.00 after the GDP release overnight. If the market goes back to the view that this weak Japanese data actually serves to keep fiscal and Bank of Japan policy on the extremely accommodative side, we could see new highs triggering significant trend-following interest higher.

Source: Saxo Bank 

The G20 failed to provide developments of interest for markets – a disappointment given the unprecedented tensions unleashed by the BoJ’s latest move. The most interesting development was perhaps Russia's president, Vladimir Putin, getting the very cold shoulder and the additional dive in crude prices ahead of the weekend, making one wonder how long he can continue to maintain his defiant posture. The ruble is trading this morning below Friday’s closing level.

Looking ahead

Watch out for the ECB’s president, Mario Draghi, out speaking later in testimony before an EU parliamentary committee. While EURUSD is trading back above 1.2500 and looks like it has neutralized the downside risk for now, we may simply be looking at carving out a range again back toward 1.2675/1.2700. There is one last hope for the bears tactically if the 1.2575/1.2600 zone of resistance remains intact and we get a strong rejection of Friday’s rally – where huge JPY cross buying on Friday may be partly to blame in USD longs getting squeezed. Other euro risks this week are the German ZEW survey for November tomorrow and the flash November PMI’s up on Thursday.

Tonight we have Reserve Bank of Australia minutes – watch for an intensifying discussion of AUD strength, as this meeting was from November 4, so a few days after the radical extension in AUDJPY higher in the wake of the BoJ’s latest move.

The USD rally seems to be on hold for the moment as the forward rate view (policy expectations from the US Federal Reserve) remain dead in the water and even slightly more dovish than was the case mid-last week, despite Friday’s very strong US retail sales report. 

The heavy lifting to get the USD stronger at the moment may have to come from elsewhere – a renewed JPY sell-off or more pointed dovish rhetoric from Draghi and other ECB members this week. 

We do have the Federal Open Market Committee minutes mid-week, however, and these could trigger sharp moves if they contain any surprises. Remember it was the last minutes on October 8 containing the discussion of the effect of a stronger dollar on Fed policy that saw the market dramatically pushing back the anticipated date of the first Fed hike.

Tomorrow we have the UK CPI release  – the final washout in GBP longs could take place if these are exceptionally weak. Longer term, another source of worry for the pound has to be UK banks’ heavy involvement in lending to China, as discussed in a Bloomberg column from late last week.
Economic Data Highlights

  • New Zealand Oct. Performance of Services Index out at 57.8 vs. 58.0 in Sep. 
  • New Zealand Q3 Retail Sales ex Inflation out at +1.5% QoQ vs. +0.8% expected. 
  • Japan Q3 GDP out at -0.4% QoQ vs. +0.5% expected and vs. -1.9% in Q2. 

Upcoming Economic Calendar Highlights (all times GMT)

  • Norway Oct. Trade Balance (0900) 
  • Eurozone ECB’s Mersch to Speak (0900) 
  • UK Bank of England’s Haldane to Speak (0930) 
  • Euro Zone Sep. Trade Balance (1000) 
  • Sweden Rikbank’s Deputy Governor Skingsley to Speak (1000) 
  • Eurozone  ECB’s Praet to Speak (1330) 
  • US Nov. Empire Manufacturing (1330) 
  • Canada Oct. Existing Home Sales (1400) 
  • Eurozone ECB’s Draghi to give quarterly testimony to EU parliamentary committee (1400) 
  • US Oct. Industrial Production and Capacity Utilization (1415) 
  • Eurozone ECB’s Coeure to Speak (1445) 
  • Australia RBA meeting minutes (0030) 

– Edited by Oliver Morrison

John J Hardy is head of FX strategy at Saxo Bank. Follow John or comment below to engage with Saxo Bank's social trading platform.


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