Everything was going so well in the overnight session, following some mixed Japanese data (stronger than expected production, inline inflation, weaker household spending) which kept the USDJPY 101 tractor beam engaged, and the market stable, until just before 2 am Eastern, when Tokyo professor Takatoshi Ito, formerly a deputy at the finance ministry to the BOJ’s Kuroda, said overvaluation of the yen versus the dollar has been corrected, which led to a very unpleasant moment of gravity for the currency pair which somehow drives risk around the world based on what several millions Japanese housewives do in unison. The result was a slide to just 30 pips away from the key 100 support level, below which all hell breaks loose, Abenomics starts being unwound, hedge funds – short the yen and long the Nikkei – have no choice but to unwind once profitable positions, the wealth effect craters, and streams are generally crossed.
And while the USDJPY was tumbling, Europe did what it does best: it continued imploding economically, with the European April unemployment rate hitting a new record high of 12.2%, even as Eurozone CPI for May printed at the expected 1.4%, up from 1.2% previously. This coupled with some comments from Bank of Italy’s Visco that the ECB is ready to intervene on rates and consider all measure to maintain credit conditions, lead to a bout of EUR weakness as speculation that ECB may cut deposit rates after all was revived. This happened despite the usual weekly announcement that European banks will repay another €3.08 billion in 3Y LTRO debt, further reducing the ECB’s balance sheet. Of course, in a continent in which there is no demand for consumer loans anywhere, this is to be perfectly expected.
Adding to the early jitters were rumors that more China official PMI would print well below the expected sub-50 when it is reported on Saturday. Since China is now actively telegraphing its economy is rapidly contracting, if only to show it is in control of the pace of contraction, this is virtually assured: the question is just how bad it is.
All of this adds up to US traders walking in once more to once again see that very odd shade of green, and a color they have virtually forgotten – red. But fear not: with no good market-driven news to report, at least we have yet another confidence driven indicator due out later, the May final print of the UMich confidence. Cause when all else fails, the broke, insolvent, homeless US consumer can at least be more confident than ever.
