Concerns Over BoJ Level of Stimulus Gives U.S. Stock Investors Excuse to Book Profits

A sharp rally by the Japanese Yen shook up the financial markets on Tuesday as investors continued to prepare for monetary policy statements from the U.S. Federal Reserve on Wednesday and the Bank of Japan on Friday.

The USD/JPY hit a one-week low as investors expressed doubts the BoJ would be able to provide enough stimulus into Japan’s ailing economy. Comments by Japan’s finance minister, Taro Aso, may have been behind the selling pressure as he raised concerns that the government will not work as closely with the central bank as investors had hoped to implement new stimulus.

Traders are looking for the BoJ to expand its asset purchases and cut rates further below zero at its two-day meeting that ends on Friday.

The Yen’s volatility, concerns over earnings in key Dow Jones components and another decline in oil prices helped drive U.S. stock markets lower on Tuesday with the Dow Jones Industrial Average falling as much as 100 points in late-morning trading.

Mixed U.S. economic data and position-squaring ahead of Wednesday’s Fed monetary policy announcement also weighed on prices. The Flash Markit Services PMI edged down to 50.9 in July from 51.4 in June. Traders had priced in a 51.2 reading.

New U.S. single-family home sales rose 3.5 percent in June to a seasonally adjusted annual rate of 592,000 units last month, topping expectations and the highest level since February 2008. The number exceeded trader expectations of 560K.

The Conference Board’s consumer confidence index was 97.3 in July, a touch below June’s 97.4 print. However, this was much better than the 95.6 estimate.

The sharp drop in the Japanese Yen weighed on the September U.S. Dollar Index, however, losses were softened by weakness in the Euro and British Pound. The GBP/USD declined after Bank of England policymaker Martin Wheale said he had dropped his opposition to policy easing and now favored immediate stimulus.

The weaker dollar helped underpin December Comex Gold prices. Position-squaring ahead of the Fed announcement also helped boost the precious metal. Holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Shares, fell 0.46 percent to 958.69 tonnes on Monday. Gold exports from China to Hong Kong reached a 6-month high of 12.2 tons in June, which contributed to lower net imports.

Support for crude oil continued to erode on Tuesday with the September contract reaching is lowest level since April. Traders are concerned that a long-awaited rebalancing of the market would be delayed due to excess supply.