Yen strengthens as BoJ says no to stimulus due to falling oil

Fundamental View

The Euro seemed to strengthen initially on the in-line take up of the TLTRO operations actioned this week, with 129.84bn Euros being taken in the second tranche by the banks. This seemed to satisfy the “no-QE” speculators and we saw the EURUSD trace higher in the short term. However the take up in the TLTRO has been, on the whole, disappointing due to the banks unwillingness to take on extra risk by lending to smaller and mid-cap companies. The surprise for the currency pair came at 12:36 with Hilsenrath, the Wall Street Journal’s Fed Watcher, reporting that the falling prices in oil could weigh on inflation and also support a US asset boom. The USD strengthened on the back of these comments but the move was stimulated further with the release of US Retail Sales for November. These surprised the markets somewhat as the higher numbers were not expected by the majority due to retailers reporting “disappointing” figures from the Black Friday sales. This along with slightly lower Jobless claims resulted in a move lower throughout the afternoon, overlooking perhaps the 2.514 million continuing claims. These numbers filtered through into equities also, with the higher numbers taking precedent over the move lower in energy stocks.

Today’s View

This morning we heard comments from the Japanese Central Bank stating that it would not add to stimulus in order to ease the blow to lower inflation due to oil. The Japanese policy markets are said to believe that lower energy costs are likely to boost the economy and spur inflation. This allowed the Yen to strengthen this morning and continue the trend higher which has been in place since Monday. We have also seen stocks move lower which also aids the leading indicator argument for the Yen. It is, however, adding to uncertainty around dollar-denominated currency moves as we have seen both the Euro and the Yen, although both still in a dovish environment, have made highs against the greenback. Today we have US PPIs due at 1330, followed by the December Preliminary report from University of Michigan Confidence. Last month’s reading of 88.8 on the Michigan number was a 7 year high so sustained readings around this point is likely to create dollar strength and a boost on stocks. We are looking for a continuation in the overnight risk off move that we have seen, with a conservative long position on crude from technical support.

Alternative View

Be aware that the traditional correlations have broken down of late and that the strategies presented reflect current market fundamentals and assume data prints in-line with our expectations.