Why Yen Volatility in Here to Stay

Market Drivers December 10, 2014
Chinese inflation declines
German RWI Institute cuts GE growth
Nikkei -2.55% Europe .60%
Oil $62/bbl
Gold $1229/oz.

Europe and Asia:
AUD Westpac Sentiment -5.7% vs. 1.9%
CNY CPI 1.4% vs. 1.6%
UK Trade -9.6B vs. -9.5B

North America:
No data today

FX markets were basically range bound for most of Asian and European trade with most of the majors treading water while USD/JPY continued its volatility ride. After yesterday's massive selloff during North American session that saw the pair drop 200 points in a span of an hour, the action today was relatively subdued but it still managed to travel more than 130 points up and down finally settling near the 119.50 level by mid morning London dealing.

One side effect of USD/JPY's recent rally has been a marked increase in the volatility of the pair and that trend is likely to continue especially if the Fed actually abandons the zero interest policy and embarks on a tightening cycle in 2015. The increase in the spread between UST and JGB yields will almost certainly increase the average daily range of the pair as it continues to attract more and more speculative flows.

On the news front, the event risk calendar has been very quiet with only Chinese CPI data release being of any import. Chinese inflation came in at 1.4% vs,. 1.6% eyed as the decline in energy costs appears to be having negative impact on price levels globally. It is worthy to note however that the PPI data has been negative for 33 straight months suggesting that industrial demand in China has clearly slowed.

Both Aussie and kiwi actually rallied in the aftermath of the release on the assumption that weaker Chinese price levels could spur the PBOC to ease further in the 2015. The antipodeans however remain in a long secular bear market and today's price action may be nothing more than a relief rally.

Both NZDUSD and AUDUSD face key event risk in the hours ahead with kiwi traders looking to the RBNZ meeting at 2000GMT and Aussie likely to see some volatility after tonight's Employment report. The RBNZ is not expected to make any changes in its language at today's meeting, but the central bank which has been very aggressive at managing the exchange rate lower, could cause a further selloff in the pair if it suggests that it may ease monetary policy next year in light of diminished inflation expectations and slower growth in New Zealand.

Meanwhile, Australia is expected to generate another 15K jobs but if the number misses its mark, the Aussie could see a selloff to fresh yearly lows as markets begin to seriously price in the prospect of RBA rate cuts in 2015.