USD/JPY Fakes out Longs as Japan Back to Recession

Market Drivers November 17, 2014

USD/JPY takes out 117.00 after weak GDP , but steep drop in Nikkei reverses move
HSBC pushes forecast to BoE rate hike to 2016
Nikkei -2.96% Europe .79%
Oil $75/bbl
Gold $1186/oz.

Europe and Asia:
NZD Retail Sales 1.5% vs. 0.8%
JPY GE GDP -0.4% vs. 0.5%
EUR 17.7B vs. 16.2B

North America:
USD Empire Manufacturing 08:30
USD Industrial Production 09:15

Its been a whipsaw night of trade for USD/JPY as the new week began with the pair first spiking to a fresh multi year high above 117.00 level only to quickly reverse and fall to 115.50 in a bout of profit taking and risk aversion as Nikkei sank by nearly -3%. The culprit for today's volatility was the the horrid Japanese GDP number which printed far weaker than the market forecast.

Japanese preliminary GDP for Q3 was forecast to come in at 0.5% but instead declines by -0.4%. This was the second negative quarter of growth for Japan putting the country into the third technical recession since the credit crunch of 2008. The surprisingly sharp decline in the headline reading was primarily caused by large inventory adjustment as firms tried to liquidate old stock.

Japan's economic results going forward should be more positive, as the country's producers will enjoy sharply lower exchange rates and much leaner inventory levels allowing them to increase production into the year end. Nevertheless, the massive downside surprise spooked investors who bailed out of the Nikkei sending it to the worst one day loss in more than three months.

The risk aversion flows also whipsawed USD/JPY longs. The pair took out the 117.00 figure on hopes that PM Abe will delay the second part of the sales tax hike in light of such weak overall demand, only to crash 150 points in less than an hour as selling in the Nikkei overwhelmed the FX market.

Mr. Abe has not made any final decision on the issue of the sales tax hike, nor has he confirmed the incessant rumors about a snap election, but given the very weak results of Q3 GDP the market is pricing in this scenario, so any formal announcement this week may only have a limited impact on the pair.

Elsewhere, cable also saw a big reversal as it dropped more than 100 points off the Asian session highs after several UK banks including HSBC and Barclay's pushed out their forecasts for the start of tightening by the BoE. HSBC revised its estimate all the way to 2016 predicting that the UK central bank will remain stationary for all of next year.

Such analysts reports typically come at the end rather than the beginning of the move which is why cable is unlikely to see much additional weakness from this dynamic. The pair has been heavily sold over the past month and is now coming into strong support at the 1.5500 level which should provide it with a modicum of stability.

In North American session today the focus will be in Empire and Industrial Production numbers as well as Mr. Draghi's speech to the EU Parliament. If US data proves to be positive and if Mr. Draghi once again hints at the prospect of QE the EUR/USD could see further losses as the day proceeds. After a massive short squeeze on Friday that took it above the 1.2500 figure, the pair could resume its downward path if the market once again begins to appreciate the policy divergence between the two regions.