JPY crosses zigging and zagging with no real conviction - should JPY longs be cautious here?

MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand Q4 Unemployment Rate rose to 4.6% as expected and vs. 4.2% in Q3

  • UK HBOS house Prices rose 1.9% MoM vs. -1.6% expected

  • Germany Dec. Factory orders fell -6.9% MoM and -25.1% YoY vs. -2.5%/-24.5% expected

  • Bank of England cut interest rates 50 bps to bring the rate to 1.00% as expected.

THEMES TO WATCH – UPCOMING SESSION

Events Today:

  • Canada Dec. Building Permits (1330)

  • US Q4 Nonfarm Productivity and Unit Labor Costs (1330)

  • US Weekly Initial Jobless Claims (1330)

  • US Fed's Plosser to Speak (1330)

  • Canada Jan. Ivey PMI (1500)

  • US Dec. Factory Orders (1500)

  • US Jan. ICSC Chain Store Sales (no time given)

  • Switzerland SNB's Hilebrand to Speak (1730)

  • Us Fed's Bullard to Speak (1800)

  • US Fed's Stern to speak (1900)

  • Australia Jan. AiG Performance of Construction Index

  • Japan Dec. Leading Index (0500)

  • Switzerland Jan. Unemployment Rate (0645)

Market Comment:

Equities tried to stage a rally yesterday as the ISM Non-manufacturingnumber recovered a couple of points rather then sinking further. Still,the number represents a service sector in strong contraction, andservices are still the majority of the US economy. Also on a positivenote, the ADP number was slightly less bad than expected. But thenumbers were not sufficient for the market to really hang its hat onand the rally in risk crosses quickly faded later in the North Americansession.

GBP followed up stronger versus its European counterparts yesterday andthis morning ahead of the Bank of England meeting. The Bank cut 50basis points as expected, bringing the rate to a new record low of1.00%. As a small minority were looking for a 100-basis point reductionin rates, the news can be considered marginally GBP-positive, all elsebeing equal. The immediate reaction saw the 0.8800 key support levelcoming under fire and even falling as this is being written ahead ofthe ECB press conference. The BoE also released a series of statementsindicating its negative view on the situation, but did note that thedrop in the pound and existing fiscal policy should help to give aboost to the economy, even if "the transmission mechanism of themonetary policy was impaired" [and if that is the case, then the marketstarts to ponder the whole quantitative easing line of logic]. All inall, this latter note suggests some degree of applying the brakes tothe otherwise dovish trajectory and with GBP pushing through keylevels, could be triggering a sustainable uptick in GBP against theother major currencies.

Also GBP supportive was the odd Nationwide housing numbers fromDecember, which suggested that UK home prices ticked up in Decembereven if they were still off over 17% from a year earlier. This couldsimply be due to a rise in activity due to the lower prices, a bit lesspanic in the forced sales market, etc...rather than a sign of imminentrecovery. Still, the shocking pace of the previous drop may not berepeated any time soon, and the leading RICS indicator suggest that alower percentage of agents are seeing housing prices falling, so wecould be in for a couple of months of relative stability.

The ECB left rates unchanged as expected as today's meeting came onlythree weeks after the previous one. Watch Trichet for furtherdevelopments. He is likely going to express a reluctance to move ratesmuch lower, but that the ECB will do what is necessary...etc andyawn...As with last time around for the ECB: is there really any EURbullish outcome?

JPY crosses are looking less heavy than one would have suspected theywould with the marked weakness in equity land late yesterday. In thebroader picture, considering the mayhem that this global slowdown iscreating for Japan's export-driven economy, we are considering notingsome caution for JPY longs here, meaning that we need to see thecrosses proving themselves lower before we would consider jumpingaboard, as it seems they are having a difficult time working up a headof steam. GBPJPY, one of the most popular trades (on the short side) inthe strong JPY cycle, has now rallied almost 10% from its lows on theyear below 120.00. AUD and NZD and some of the EM currencies arelooking a bit resilient here as well and risk spreads are simply in thedoldrums. With the fear levels seeming to fade somewhat, it appearsthat back and forth sloshing and a treacherous ranging environment withfalse breaks is as likely as a new big bear trend here in the riskaversion-themed FX crosses....stay tuned and watch the 800 level inS&P500, as this is a big trigger event across markets.

NOK continues to look strong after the bank cut rates 50 bps yesterday,a marked sign of strength in this market as we suspected there was somechance of a consolidation higher yesterday in the wake of the NorgesBank meeting. Could we be hitting a fifth wave already for the declinefrom the 10+ top? If so, this wave could take us all the way to 8.50,where the 200-day moving average might be in a few days time from itscurrent 8.475 level