USD/JPY: The Night Is Dark And Full Of Terrors

Japanese stocks have endured yet another torrid night with the Nikkei 225 now down 20% from the highs it posted last month. Classical theory now dictates that the Nikkei is in a ‘bear market’ and given the market has now fallen to its lowest level since the Bank of Japan announced its policies of massive monetary easing and the 2% inflation target.

There is no specific reason for last night’s move, but it seems obvious that yesterday’s move higher was simply as a result of those investors who have been betting on falls squaring their positions – which prompts increases in price – before jumping back in last night. It seems that most of this pressure came from the yen.

USD/JPY has continued to slump violently over the disappointment that the Bank of Japan did not once again let loose a flood of further quantitative easing at its meeting on Monday night. The trend of liquidity fears will not be easy to quell in the short term, but last night’s moves do seem to have been fairly Japan-centric (i.e. we have not seen huge losses for peripheral markets yet).

As we said yesterday, fundamental data is being lost in the noise at the moment but still forms the basis for a currencies individual support. UK data yesterday continued its optimistic turn and as far as good pieces of labour market data go, you don’t get much better than this.

Employment is higher after two poor months, claims of job insurance have fallen for the 7th month in a row and, most importantly, for the first time since August of last year, we have seen an increase in wage growth – and one which doesn’t include the lumpy effects of bonus payments.

The key question mark against the progress of the UK economy has been how its growth level has not been higher, given the relatively low unemployment figures compared to our European counterparts.

Good news also emerged from the Eurozone with Euro-area industrial production beating expectations by climbing 0.4% in April. It was down 0.6% from a year ago.

Bearing that in mind, the pressure on markets will see further losses at the European open with US advance retail sales the key data point for the day. The hope will be that a figure denoting a strong US consumer will be enough to arrest the slide, but consensus numbers put the increase at 0.4% – hardly a barn burner.