Dollar Gains on All but Yen

Market Drivers December 08, 2014

USD/JPY reverses off fresh highs to 121.00 after weak Japanese GDP
More dovish talk from Nowotny pushes EUR/USD to 1.2250
Nikkei 0.08% Europe -0.42%
Oil $65/bbl
Gold $1195/oz.

Europe and Asia:
JPY Japan GDP -0.5% vs. -0.1%
CNY Chinese Trade 54.5B vs. 44.3B
EUR GE IP 0.2% vs 0.2%
EUR Sentix -2.5 vs. -9.9

North America:
CAD Housing Starts 8:15
CAD Building Permits 8:30

Dollar continued to rally against the rest of the G10 universe on the first trading day of the week with yen being the only exception as the pair saw some profit taking ahead of the 122.00 figure. USD/JPY actually opened up strong in early Asian session dealing with the pair enjoying some follow through after Friday's blockbuster US NFP number that beat market estimates by nearly 100K more jobs. However, the weaker than expected Japanese final GDP figures triggered a bout of profit taking and the pair continued to slide for the rest of the night finding its first level of support just ahead of the 121.00 level.

Japanese GDP data was truly horrid with final revision coming in at -0.5% versus -0.1% eyed with business spending the primary factor for the miss. Business spending declined by -0.4% versus a projection of 0.9% gain, but as we have been arguing for days the decline in exchange rates and energy prices could provide the necessary boost for the recovery in quarters ahead.

In any case the correction in USD/JPY was long overdue with the pair having soared more than 200 points over the past several days as it took out the key 1.2000 level last Thursday. The pair now stands at nine year highs and faces long term resistance at these levels so a deeper correction towards the 1.2000 figure may very well be a possibility this week as markets try to work off some these overbought conditions.

The euro on the other hand continued to slide against the buck taking out the 1.2250 level after a series of dovish comments from ECB member Nowotny who appeared to be backing President Mario Draghi in the desire to expand the central bank's balance sheet. Mr, Nowotny noted that inflation was too low in the region and that he would like to see the ECB expand the balance sheet by 1 Trillion euros. While he did not go so far as to support sovereign debt QE, Mr. Nowotny was sending a clear message to the market that the council was preparing to make policy move in the early part of next year despite the strong opposition from the Germans. The fact that Mr, Nowotny comes from Austria suggests that the current policy rift on ECB is not aligned along the North/South divide but is rather a disagreement between Germany and the rest of the monetary union.

The buck was also well bid against the comm dollars with both kiwi and Aussie decidedly weaker at the start of week's trade on continuing concerns about growth in Asia Pacific region. The kiwi has hard hit from the start of trade eventually dropping to 7625 before finally finding some support as traders prepared for the RBNZ statement later in the week. There is some concern that the RBNZ may lower its inflation guidance suggesting that the central bank will not raise rates at all in 2015 which is likely to put further downward pressure on the unit.

Meanwhile Aussie slid below the 8300 mark bottoming at 8259 level after Chinese Trade Balance data unnerved investor in Asian session trade. Chinese Trade printed much better than expected on the headline basis coming in at 54.B versus 44.3B projected, but all of the gains were due to a massive reduction in imports which fell -6.7% versus 3.8% expected rise. The near 10% reversal in imports from their forecast value suggests that demand in China has fallen markedly and that dynamic is likely to pressure both AUD/USD and NZD/USD in the foreseeable future as investors worry about the spillover effects into both countries GDPs.