Market Drivers for October 28, 2013
China/Japan tensions escalate sending USD/JPY higher on open
Risk appetite better at start of week as high betas remain bid
Nikkei 2.19% Europe -0.15%
Oil $97/bbl
Gold $1352/oz.

Europe and Asia:
CNY Industrial Profits 13.5% vs. 12.8%
GBP Hometrack 0.5% vs. 0.5%
GBP CBI Sales 32 expected

North America:
USD Industrial Production 9:15 AM
USD Pending Homes Sales 10:00 AM

It’s been a very quiet night of trade on the first session of the week, with the newsflow coming from Asia where a war of words between Japan and China caused a mild pop in USD/JPY. Over the weekend Japanese PM Shinzo Abe in an interview to WSJ stated that, “ There are concerns that China is attempting to change the status quo by force, rather than by rule of law. But if China opts to take that path, then it won’t be able to emerge peacefully. So it shouldn’t take that path, and many nations expect Japan to strongly express that view. And they hope that as a result, China will take responsible action in the international community.”

In response, the Chinese foreign ministry spokesperson Hua Chunying noted the the Japanese PM’s comments were “self-deceiving”. The two nations have seen a series of confrontations over the past several weeks with incursions of Japanese air space by Chinese fighters, threat to shoot down drones and ongoing conflict over the territorial claims of the disputed islands in the South China sea known as Senkaku in Japan and Diaoyu in China,

So far the tensions between the two countries have remained at low boil, with markets generally shrugging off the saber rattling from both side. However, the conflict continues to be the key source of tension in the region and any type of military confrontation will certainly focus attention on the issue very quickly.

The yen which typically strengthens in times of stress, actually weakened on the news as USD/JPY gapped higher on the Asian open and remained above the 97.50 level by morning London dealing. The weakness in the yen shows in this particular dispute the risk aversion flows may accrue to the dollar. The pop in USD/JPY pair was also aided by the 2% + rise in the Nikkei and reports that the massive Japanese post office savings portfolio may shift some of it bond holding away from JGBs.

Over the past week, several large institutional investors in Japan have signaled that they may shift their allocation away from the domestic fixed income market. Many market analysts have been expecting this move since the he start of Abenomics, but up to now Japanese capital flows have been generally unchanged. If this new found willingness to move capital abroad becomes a broad trend, it would provide a very strong catalyst for another upleg in the USD/JPY rally.

With economic calendar nearly barren of any data, the rest of FX remained very quiet in Asian and early European trade with comm dollars performing best after a weekend report that showed China’s Industrial Profits rising by 13.5% versus 12.8%. In North American trade today the calendar carries Industrial Production and Pending Home sales data, but the focus will lie with equities as Apple is expected to report after the market close. Barring any fresh newsflow we may remain in these tight ranges for the rest of the day.

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