Asian Market Update: Yen continues to pare gains on more backtracking from Japan officials, new deflationary lows in August; S&P/ASX rallies to 11-month high on lower 2008/09 budget deficit in Australia


ECONOMIC DATA

- (NZ) New Zealand Aug Building Permits M/M: 1.7% v 4.5% prior

- (KS) South Korea Aug Current Account: $2.0 v $4.4B prior (Lowest surplus since Jan 2009); Goods Balance: 3.5 v $6.2B prior

- (JP) Japan Aug National CPI: -2.2% v -2.2%e ; Core National CPI: -2/4% v -2.4%e ; Sept Tokyo Core CPI: -2.1% v -2.0%e (multi-year lows)

- (NZ) New Zealand Aug Money Supply M3 Y/Y: 3.5% v 3.8% prior

- (AU) Australia FY08/09 budget deficit A$27.1B vs prior est of A$32.1B

- (KS) South Korea Oct-Dec Business Survey Index for Manufacturers: 113 v 108 prior (2 yr high)

- (JP) Japan Sep Small Business Confidence: 43.5 v 41.8 prior


SPEAKERS/FIXED INCOME/FX

- Asian equity markets are pulling ahead after yesterday's selloff, boosted by the Wall St. optimism stemming from a rise in M&A activity. With about 2 hours to go in Tokyo, Nikkei225 is up 0.7%, cheering Japanese officials talking down the yen rally but also underperforming regionally on multi-year low levels of inflation for the month of August. The Taiex and S&P/ASX are leading the charge with 1.8% gains on positive fundamental developments from both Taiwan and Australia.
Korea's Kospi is also moderately firmer, with gains held back by deterioration seen in the August current account surplus.
Ahead of the Tuesday US session, front-month S&Ps are unchanged around $1,059, as traders look ahead to the Case-Shiller home price data.

- In Tokyo, policymakers heeded equity market reversal after officials backed away from their non-interventionist currency policy in the latter part of the prior session. Reiterating his opposition to accentuated volatility favoring the yen rally, Finance Minister Fujii added that he never said he would accept or endorse a strong Yen and may actually consider intervention if FX moves become more abnormal. Fujii did note however that historically, Yen devaluation can be detrimental to global economy, and that the recent rally has been a part of the natural FX range. On the fiscal side, Fujii once again suggested the current budget requests will be abandoned, planning for a budget focused on fiscal discipline. A host of other voices also spoke out in favor of closer monitoring of FX rates with implicit curb on Yen strength: Deputy Prime Minister Kan urged greater stability in FX fluctuation, ecial Currency Advisor Gyohten said Japan should continue support of USD as key reserve currency, and former BOJ executive Hirano noted that Fujii's initial hands-off stance was misinterpreted and did not indicate a shift in Yen policy.

- A better than expected fiscal report from Australia's government boosted S&P/ASX to 11-month highs on stronger than expected revenue from tax receipts. Australia FY08/09 budget deficit of A$27.1B came in below the prior estimate for deficit at A$32.1B. Speaking after the budget report, Treasurer Swan cited fiscal stimulus in helping economic activity and employment, while also forecasting the RBA to adjust rates in response to market conditions. Specifically, Swan attributed company tax receipts to lower deficit, but did note that some softness in corporate sector investment was possible.
Elsewhere in Australia, RBA's Richards reiterated Governor Stevens' hawkish stance, suggesting it was not reasonable to expected rates to stay at current lows and warning against a potential price growth bubble in housing. Earlier, influential RBA watcher McCrann was said to have helped lift the Aussie Dollar, forecasting consecutive 25bp rate hikes at the November and December decisions.

- In other notable regional speakers, Bank of Korea governor Lee remained upbeat despite the 7-month lows in South Korea current account, forecasting September surplus at $4B vs the August $2B levels. In Taiwan, the tech space was boosted by Economics Ministry report that the government may open up its LCD and chip industry to Chinese investors.


EQUITIES

- In specific equity movers in Tokyo, Kobe Steel rallied 7% after Japanese press speculated the company plans to increase its copper strip production to meet rising demand from auto and home appliance sectors. Fuji Electric and Nippon Airways traded up 2% - the former rising after the company backed away from its plans to shutter two domestic production facilities and the latter gaining on Credit Suisse upgrade. Outside the Nikkei, Qantas reported August load factor rates at 80.5% in August, up from 77.7% y/y but down from 82.9% in July. In Korea, Posco cut its benchmark stainless steel prices by over 4%, but noted that slack in demand would abate by Q4.


CURRENCIES

In currencies, jawboning by the Japanese officials extended the Yen decline, with USD/JPY rising above 90.00, EUR/JPY breaking above 131.70, and GBP/JPY recovering above the weak-opening 143.00 handle. GBP also retraced its selloff after PM Brown backed away from perceived tolerance of weakening Sterling, as GBP/USD rose above 1.5950 and EUR/GBP fell below 0.9180. In other European majors, EUR/USD and USD/CHF ranged in respective 1.46-4650 and 1.03-0350 bands. In commodity FX, AUD also recovered from recent slide, with AUD/USD rising above 0.8750 and AUD/NZD bouncing from the psychological 1.20 level toward 1.22.


COMMODITIES

- Crude oil prices are little changed and trading around $67/bbl as of the time of writing. In NY floor trading , crude closed higher by more than 1% at $66.85 on the advance in equities. Looking ahead, possible event risks for oil crude include the US weekly API inventories data and US housing price data. Spot Gold prices are little changed and trading near $990/oz.
During the COMEX session, gold prices ended higher by more than $2.00 to close at $994.10/oz.