Market Drivers December 9, 2014

USD/JPY see further liquidation as 120 gives way
UK MP/IP misses
Nikkei -.68% Europe -1.042%
Oil $63/bbl
Gold $1204/oz.

Europe and Asia:
AUD NAB Business Conf. 1 vs. 5
UK MP -0.7% vs. 0.2%

North America:
USD Economic Optimism 10:00

A decidedly risk off tone in capital markets today triggered yet more profit taking in USD/JPY today with the pair falling as low as 119.52 before finally finding some support. New out of China that the Securities Regulatory Commission will no longer allow less that AAA bonds to be used as collateral in repo trading on the stock exchanges caused a massive liquidation of Chinese bonds and pushed the yuan to its lowest level in six years.

The news unnerved investors in Asia and the fall in the Nikkei only exacerbated the decline in USD/JPY. We have been arguing that the pair was in serious need of a technical correction and today’s events provided a perfect opportunity for traders to take profits. It appears that USD/JPY will now consolidate in a broad 119.00-121.00 range until next week’s FOMC meeting.

Meanwhile in Australia the news remained bleak with NAB Business confidence sinking to 1 from 5 and Westpac now calling for two 25bp RBA rate cuts next year. If that forecast turns out to be true the Aussie is very likely to fall towards the 8000 figure as carry trade liquidation will continue unabated. The pair tumbles to a low of 8224 in today’s Asian session trade before some short covering finally kicked in to lift back towards 8300.

The sentiment towards the Aussie is very negative, but the pair is also grossly oversold, so if the greenback continues to see some profit taking over the next few days the AUD/USD could climb back towards the 8400 figure on a pure relief move, but any rally will simply offer shorts an opportunity to reload as the macro picture in Asia Pacific clearly points to an economic slowdown.

Finally in UK the Manufacturing Production and Industrial Production data missed its mark with MP falling -0.7% versus 0.2% eyed. The report was horrid all across the board with electronics leading the decline. Cable tumbled to 1.5630 in the aftermath of the release but steadied and rebounded to 1.5650. Although the output data was bad the latest PMI Manufacturing suggested that activity picked up again so traders shrugged off the report.

With nothing on the US docket except Economic Optimism at 1500 GMT trading in North American session is likely to take its cue from equity markets. Any further decline in equities will likely test the 119.50 level and perhaps even the 119.00 barrier as profit taking is likely to continue.

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