Lack Of Confidence In BOJ Makes USD/JPY Vulnerable

 | Sep 16, 2016 01:18AM ET

Certain about Uncertainty

Overnight, US economic data disappointed as retail sales fell for second consecutive month, nudging the December US interest rate hike probability to fall below 50%.

The focus now shifts to CPI which could have a significant impact on rate hike expectations, even more so in the wake of the tepid Retails Sales print.

A benign inflation print will likely reverse much of the recent yield curve damage and put the USD on the defensive. The Atlanta Fed GDPNow indicator plumbed to only 3% from 3.3% Sept 9.

Japanese Yen

The market looks as if it is giving up on the long USDJ/PY as US economic data points south, and with a minuscule chance the BOJ will reach a mandate consensus from their policy review, it would suggest that downside risk is gaining favor. The bar is always high for the BOJ and traders are now distressed over an another headline that the BOJ is split over the mechanisms for providing additional stimulus.

But given the BOJ’s penchant for a surprise, the only certainty is to expect more uncertainty in the build-up to next week’s BOJ meeting. Indeed, the market is more anxious about the BOJ decision rather than the Fed decision, which at this stage is all but priced out for a September rate hike.

There’s a growing consensus that the BOJ will refrain from moving deeper into NIRP this meeting, but will keep all options open for November and will forward guide that choice at next week’s meeting. There’s a severe lack of confidence over BOJ policy brewing this morning.

Coupled with the lack of confidence in the BOJ and with the Feds likely sitting tight due to political uncertainty regarding the US presidential election, USD/JPY is very vulnerable, which brings intervention options back to the fore.