There are a number of risk events this week that can propel equity and currency markets.
Today we get the ruling from the group of gaudily-cloaked German judges on the Constitutional Court, who will tell the world if the German government is permitted to participate in the European bail out. The equity and currency markets are trading like approval will be no problem.
Also today, the US Fed open market committee will commence their meetings, and their conclusions will be announced at a press conference Thursday. After the Jackson Hole speech by Bernanke, where he championed QE as a method for stimulating growth and employment, markets anticipate a new round of easing. After last Friday’s poor employment numbers, the market now expects the new QE will start no later than next Friday the 21st of September.
From previous experience, traders know a new round of liquidity is bullish on stocks and commodities, and bearish on the USD. Has this outcome already been priced into the market?
There are some other pending risk events. Today there is a vote in the Netherlands with some of the parties vowing to leave the euro, and bring back their own currency. In Greece, the government efforts to finalize the new austerity package requested by the troika failed. There were peaceful demonstrations, though one Greek leader said: ” I wish we had become Argentine,” who defaulted on their sovereign debt in 2002.
If the events unravel as the market anticipates, Bernanke injects liquidity, equities continue to soar, and the USD tumbles, where does this put the yen? Yesterday it was soaring versus the USD, currently trading at 77.80.
Strength in the yen is about the last thing the Bank of Japan and Japanese exporters want. Earlier, it was reported the GDP slipped to +0.2% in Q2, and is now forecast to be only +0.7% for the year. The Japanese Trade Balance was negative -373.6B¥ for the third time of the last four months.
The once mighty Japanese export machine has lost its competitive edge to cheaper labour, demand from weak economies, especially China, and a strong yen. Electronics companies like Sony, Sharp, and Panasonic are all in dire straits, cutting costs and wages, looking for ways to survive. Auto production has been moved offshore where labour is cheaper. Nissan is even making cars elsewhere and shipping them back to Japan.
The Bank of Japan meets September 18-19, with several reasons why they need to commence their own version of quantitative easing. Should the Fed lead the way, and with the suffering Japanese exporters cheering them on, the BOJ might start policies designed to weaken the yen.
These are event-driven markets and quite volatile, and a market that can go further than expected. It is best to watch the news closely rather than price level to determine if and when the BOJ will help weaken the yen (USDJPY, FXY:US).