Market Drivers October 22, 2012
Rajoy wins in Galicia sending relief through the market
Yen weakens across the board with EURJPY hitting best level since May
Nikkei 0.09% Europe 0.37%
Oil $90.68/bbl
Gold $1725/oz.

Europe and Asia:
JPY BOJ Minutes
JPY Merchandise Trade Balance Total -0.9T vs. -0.74T

North America:

Improving risk appetite and relief over the election results in Spain sent high beta FX higher in European dealing today on the first trading day of the week, while yen weakened across all pairs with USDJPY solidly breaking out above the 79.50 level as the country’s trade deficit widened again.

Japan’s trade balance once again turned into a deficit printing at -0.98T versus -0.74T eyed as the impact of the strong currency and the escalating diplomatic problems with China clearly weighed on the data. Japan’s exports slipped by more than -10% – the most since last year’s earthquake as the country recorded its 15th consecutive monthly trade deficit. Analysts are now forecasting that Japan may slip into contraction in the third and fourth quarter of this year as it continues to lag the rest of the G-3.

Economy Minister Seiji Maehara pressed the Bank of Japan for more action yesterday, saying the nation is “falling behind” in monetary stimulus and is at risk of another credit- rating downgrade. The BOJ today cut its view of eight out of nine regional economies but remains cautious in its approach to monetary policy and is still unwilling to take dramatic steps like the Fed or the ECB. The yen however is finally starting to feel the impact of the slower Japanese growth as the currency finally weakened despite tepid risk appetite flows in the market. EURJPY reached its highest level since May as it cleared the 104.00 while USDJPY looks to be on its way towards testing the key 80.00 barrier as the day proceeds.

USDJPY has had a series of false breakouts over the past several months, but with US growth picking up momentum while Japan’s economy clearly lags market sentiment may be shifting as the currency no longer gets the benefit of the doubt as a safe haven harbor. With Japan running chronic trade deficits now, the country is no longer a generator of surplus capital and as such its currency may become much less attractive to foreign investors. For the time being it appears that USDJPY has formed a clear bottom at the 78.00 level and may be finally starting a long awaited turn to the upside.

With no eco data on the docket in North American trade the FX market will likely take its cue from equities which sold off hard on Friday and may stage a short covering rally as the day proceeds given the calming news from Europe where the Rajoy government was able to expand its seat count in the stronghold region of Galicia strengthening the Prime Minister’s position vis a vis the bailout talks.

The euro has remained relatively well bid throughout the night and may make another run at the 1.3100 level as the day proceeds if risk flows continue to be supportive into North American trade.

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