USD/JPY Breaks to New Multi-Year Highs

Market Drivers November 14, 2014

USD/JPY makes fresh highs as rumors of sales hike delay persist
GE GDP better but FR Labor worse
Nikkei 0.56% Europe .23%
Oil $73/bbl
Gold $1152/oz.

Europe and Asia:
EUR GE GDP 0.3% vs. 0.1%
EUR FR NFP -0.2% vs. 0.2%
EUR GDP 0.2% vs. 0.15

North America:
USD Retail Sales 08:30
USD U of M 09:55

USD/JPY broke out to fresh multi-year highs in Asian and early European trade today on persistent rumors that PM Abe will call a snap election and will delay the 2nd increase in the sales tax hike to possibly 2017.

Japan's Mainichi Shimbun reported that PM Abe may dissolve Parliament as early as November 19th and will delay any additional sales tax hikes due in October of 2015. Although Japanese officials have consistently denied these reports this is the second story this week from the Japanese business press that suggests these policy actions are imminent.

These reports come just ahead of the highly anticipated Japanese GDP numbers due Monday. The preliminary GDP data for Q3 of this year will be critical to determining if Mr. Abe will hold off any further tax increases. Several Japanese officials believe that that data is likely to show weakness, providing Mr. Abe with opportunity to dissolve Parliament and delay the tax hike.

The news was greeted enthusiastically by the market as it suggests that Mr. Abe will maintain the highly aggressive accommodative policy that has weakened the yen materially over the past several months. USD/JPY has broken above the 116.00 figure and has made fresh multi-year highs at 116.40 in morning London dealing.

The pair may extend its rally further later in the day if US data proves supportive. The North American calendar brings US Retail Sales and U of M data and given the decline in gasoline prices the expectaton is that both consumer sentiment and and consumer spending will have increased last month.

An upside surprise in US data should only add to the USD/JPY rally as it will highlight the growing divergence in the monetary policies of the Fed and the BOJ. More importantly strong consumer spending should also nudge US 10 year rates higher which could in turn help propel USD/JPY towards the 117.00 level as the day proceeds.

Elsewhere the data in Europe was mixed with German GDP printing a bit better at 0.3% vs. 0.1% eyed while French NFP showed a disappointing contraction to -0.2% versus 0.2% expected. The news confirmed that demand in the EZ remains moribund as the region continues to struggle with growth.

The EUR/USD made a half hearted attempt to clear the 1.2500 level but was repelled once again as demand for the pair remains lackluster in the wake of persistent weakness in the EZ economy. Indeed if today's US data shows further improvement EUR/USD could once again begin sliding to 1.2400 level.