Nikkei Falls On Stronger Yen; Stimulus Setback

On Friday, the Nikkei fell as the yen surged higher than the U.S. dollar. On top of a stronger currency, the exchange pulled back in part thanks to a stimulus setback. Oil prices fell as investors digested news of oil and gas inventories increasing by a larger amount. The Nikkei closed the trading day down by 1.09% to 16,627.25 points.

Yen Boost

One of the reasons why the Nikkei closed lower was thanks to a surging yen. The USD/JPY pair fell to 106.03 on Friday. In other words, the yen strengthened against the greenback. This caused the pair to fall lower to the 106 level. In comparison, when the USD/JPY pair falls that means that the greenback can no longer buy the same amount of yen as it could beforehand. On Thursday the dollar was slightly stronger against the yen, because the pair traded at 1071.5. While technicals offer up a partial explanation on the movement of the currency, they don’t paint the whole picture. There are a few other reasons why the yen has traded higher against the dollar. One other reason is thanks to a dovish Fed. The Fed backtracking on the amount of rate hikes has led the dollar to weaken against a basket of other major currencies. Think of it this way, when the Fed raises interest rates it causes the dollar to become a more wanted trading vehicle. So, when the Fed backtracked on the amount of interest rates it would perform it caused investors to flock away from the currency. That leaves the yen unchecked and unmatched to trade higher. A currency correlation has always existed between how a currency trades and how an indice reacts. In this case, a higher yen has led to the Nikkei trading lower.

Stimulus Hope Evaporated

In addition to the yen currency trading higher, there was some unrest from traders due to an interview by the Bank of Japan’s Governor Haruhiko Kuroda. The interview, which was reported to have taken place in June, inferred that the Bankof Japan would not print money to help stave off deflation. This goes against the notion that policymakers were willing to do anything, even print money, to provide some form of stimulus for the Japanese economy. It was estimated that Japan was gearing up to provide the economy with a stimulus package worth up to 20 trillion yen, or $188 billion. The backtracking on stimulus, indicates to the market that the economy is in better shape than it really is. Again, with the yen trading higher it caused the Nikkei to trade lower.

Oil

Oil was another contributing factor to why the Nikkei traded lower on Friday. The Energy Information Administration — EIA — reported that U.S. crude inventories are at an all time yearly high with 519.5 million barrels. To top it off, gasoline stocksrose by 911,000 barrels to a total of 2.08 billion barrels. There was hope that the summer months would drive demand for oil, but instead inventories have been piling up. The fear of a global oil glut still remains in the cards, which is why the Nikkei has reacted negatively. Brent crude settled down by 1.17% to $45.66 a barrel. U.S. crude closed down by 1.25% to $44.19 a barrel. If that wasn’t bad enough additional supply is expected to be added to the global stockpiles. OPEC’s second largest oil producer, Iraq, saw the amount of exports rise in July. This means that Iraq now has excessive supply, which in turn negatively impacts the price of oil. Oil needs demand to trade higher, and the problem is that Asia is currently affected greatly. The Asian diesel market remains in a tough state, especially since demand has continued to decline. The Nikkei probably traded lower based on the fact that Asian diesel demand is weak. As long as the diesel market continues to show signs of weakness, than it will be difficult for the Nikkei to trade higher.