USD/JPY – Yen Rally Continues As Markets Fret Over Ukraine

 | Mar 14, 2014 08:30AM ET

The Japanese yen continues to make inroads against the US dollar, as the pair trades in the mid-101 range in Friday trading. There is growing tension in the markets over the crisis in the Ukraine, with a referendum over Crimea scheduled for Sunday. On the release front, US Unemployment Claims looked sharp, while Retail Sales met expectations. In the US, today's key events are PPI and Preliminary UoM Consumer Sentiment. Over in Japan, the BOJ released minutes of its last policy meeting, with policymakers saying the country's economy is on track. The sole Japanese release on Friday, Revised Industrial Production, came within market expectations.

All eyes are pointed east of the Eurozone, as the crisis in the Ukraine quickly heads to a boiling point. Russia has effectively taken over Crimea and a referendum over whether the region's residents wants to join Russia will be held Sunday. Europe and the US have already slapped some sanctions on Russia, and have vowed to take stronger steps if the referendum goes ahead. There are also fears that Russia could invade eastern Ukraine, which has a pro-Russian population. Secretary of State John Kerry is meeting on Friday with his Russian counterpart to try and de-escalate the crisis, which some European leaders have described as the worst since the end of the Cold War in the 1990s.

No news was good news as far as the yen was concerned, as the BOJ minutes contained no surprises. The central bank said that the economy and inflation is in line with the forecasts, and the April sales tax hike should not hurt economic growth. The Abe government is implementing the tax hike in a bid to tackle Japan's massive national debt, and there are concerns that consumer spending could suffer, which would in turn hurt the current recovery.

In the US, concerns about the job market eased after a solid Unemployment Claims release on Thursday. The key indicator dropped to 315 thousand, down from 323 thousand the previous week. This beat the estimate of 334 thousand. This was the second straight drop for the key employment indicator. Core Retail Sales and Retail Sales both posted gains of 0.3%, which were within market expectations. These indicators are the primary gauges of consumer spending, and although the gains were modest, they mark an improvement over the January readings.

With Nonfarm Payrolls improving and Unemployment Claims dropping, the markets can breathe more comfortably as the Fed is likely to take its scissors and trim QE next week for a third time. New York Fed President William Dudley stated last week that the threshold to alter the Fed's program to wind up QE was "pretty high". In other words, short of a serious economic downturn in the US economy, we can expect the QE tapers to continue, with the Fed aiming to wind up the program before the end of 2014.

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