Asian session opens week with a bang with JPY on wild roller coaster ride.
Busy economic data week ahead. New Democratic Finance Minister Fujii learns the power of words to move the market.
MAJOR HEADLINES – PREVIOUS SESSION
- Germany Regional Sep. CPI for Saxony, Hesse and North-Rhine Wesphalia out at -0.3%,-0.5%, -0.3% respectively
- US Chicago Aug. Fed National Activity Index out at -0.90 vs. -0.56 in Jul
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
- Upcoming Economic Calendar Highlights
- US Sep. Dallas Fed Manufacturing Activity (1430)
- New Zealand Aug. Building Permits (2245)
- Japan Sep. Tokyo and Aug. National CPI (2330)
- Australia RBA's Richards to Speak (0130)
- Japan Sep. Small Business Confidence (0500)
Market Comments:
JPY roller coaster
The Yen started the week with wild gyrations after new Finance Minister Fujii unwisely made very direct remarks about the Yen's strength, suggesting that the moves in the currency thus far were not excessive. This was seen as waving the red flag in front of the bull's nose, and the market rushed to buy even more JPY. USDJPY plummeted to 88.25 and EURJPY actually traded below the 130 handle briefly. Later, the damage control started (Fujii: "never said I will leave the yen to strengthen", etc...) and this little episode has likely taught the leadership to speak more carefully in the future. Again we note the importance of the end of month trade for JPY crosses. It also appears that this latest move has stretched well beyond fundamental support in the interest rate markets, as bonds have been strong, but have actually consolidated some of their gains to open the week. For JPY gains to be sustainable in the medium term, a firm push lower below that 3.25% yield on the US 10-year benchmark may be a prerequisite - though something bigger could be under way here with the Yen - more on this below.
Irish referendum this week
The UK Telegraph's Booker wrote an interesting opinion piece on the upcoming Irish referendum on the Lisbon treaty, calling it the "last stand against the 'project'". In it he describes the desperate measures the Euro-leaders have gone to in order to ensure a Yes vote. A Wall Street Journal opinion piece out yesterday by Derek Scott called "The truth about the Irish Economy" also contains valuable perspective. A few months back it appeared there were good odds of a No vote, which many have said would have significant consequences for the EuroZone - though somehow the EuroZone "project" has managed to stumble along since France and other countries rejected the Euro constitution back in 2005. Now it appears the Irish, for whatever reason, are leaning more decisively towards a Yes vote. This despite a strong currency that is the last thing the country needs and soaring unemployment and a desperate fiscal picture. The jury is still out on whether the project will survive a double dip as well as it survived the initial crunch. Discipline in the ranks has so far been remarkable considering the stresses.
US Data this week
This is an important week for US data, with the ISM on Thursday and Employment Report on Friday. We're still simply in "second derivative improvement" mode for employment, which is almost always a very lagging indicator. The speculation is growing in the commentary that the coming recovery will not be strong enough to soak up the endless ranks of the jobless, which will sustain not only the human misery, but political pressure as well. It will weaken the already rapidly weakening Obama administration.
USD rally on the ropes? Ask stocks...
The consolidation/correction in the dollar was halted overnight after it pushed through to new highs in the Asian session. EURUSD snapped back above the 1.4615 resistance after posting a 1.4570 low. With this reversal, it appears that the USD correction could be over for now and that we have carved out a new range, though, as usual, it will likely be up to the equity market to decide for FX traders what the next move will be. The USD is the new carry trade more than ever. The jobs report on Friday will be an important event risk to focus on for a pivot, as will next Monday's ISM Non-manufacturing survey, which is really far more important than the ISM manufacturing survey this Thursday.
GBP searching for a bottom
The pound found signs of support after yet another spike lower in the Asian session. Damage control is beginning in the UK now as this move is far too strong for the administration to ignore as it could if the weakening had taken place over a few months rather than a few days. Darling was out saying there is no deliberate weak pound policy. Brown also spoke about the need for fiscal discipline. The G-20 outcome can be seen as UK negative due to the stronger than expected unity on the need to curb bank's compensation schemes and raise capital reserve requirements. The UK FSA announced it would review its code on bankers' pay, though it said it was already compliant with the Financial Stability Board's guidelines. Darling was also out asking banks to stop pay "automatic bonuses."
Chart: EURJPY
EURJPY is having a look at its 200-day moving average again. The JPY is able to make progress across the market without terribly strong signs of risk aversion as interest rates are still very low and it seems the USD and the GBP have replaced the JPY as the new carry trade. This makes some sense as Japanese current account fundamentals are positively correlated with a global recovery, while the opposite is true of the UK and the US (a recovery would see an expansion in the current account deficits of those countries). A tectonic shift may be under way in which the Yen goes back to its old, old relationship with risk appetite. During the internet bubble days, for example, the highest flyer was none other than the low-yielding Japanese Yen...Stay tuned. Let's see if the Yen can break away from its slavish correlation with interest rates spreads in the near term.
