Largest USD/JPY Drop in 3 Years, China in Focus

USD/JPY crumbled after the BOJ opted to maintain the status quo, something we warned about yesterday. The yen was easily the best performer while the US and New Zealand dollars lagged. The BOJ opted to maintain the status quo at its monthly meeting. 1 of 3 EURUSD longs hit all targets and so did 1 of 2 GBPUSD longs. Rest of the trades, EURUSD charts and unfilled AUDUSD are in the latest Premium Insights.

The economic data calendar was nearly empty on Tuesday but that didn't stop waves of selling the yen crosses. USD/JPY crumbled as low as 95.60 compared to 99.00 before the BOJ decision.

A Nikkei story a few hours before the BOJ decision leaked the possibility of no loan extension and it was seen as a mild disappointment. The market showed, however, that it was looking for an excuse to scramble back into yen.

The timing of the drops in the yen crosses was suspect as the pair fell 80 pips in two minutes in quiet US afternoon trading. Margin calls, algos, liquidation, Fed taper and all the other usual suspects were floated as reasons for the sudden move. Far-fetched  fundamental ideas like protests in Turkey and new Japanese bank bail-in rules were also used as explanations but those are too marginal to cause that type of selling. We suspect dislocations or hedging in the exotic carry trade market (via structured notes) may have been the culprit.

Whatever the reason, the takeaway is that these are extremely volatile and illiquid markets. At one point EUR/CHF gapped 60 pips lower in seconds and 30-40 pip moves in all the major pairs were commonplace. This type of volatility feeds on itself as it scares away liquidity.

One event to watch in the hours ahead is a speech from New Zealand central bank Governor Wheeler at 2230 GMT . He has been jawboning against NZD for months with limited success but  the thing about talking down a currency is that it works best when you're going with the direction of the market.

Economic data on the calendar comes at 2350 GMT when Japan releases April machine orders and the May Domestic Corporate Services Price Index. Don't expect market moves on either.

Instead, the quietest market might be the place to look. China has been closed all week but there is chatter about a huge selloff in stocks there when they reopen tomorrow. Emerging markets have been hard hit this week and it could hit a crescendo (or stabilize) when China re-opens.