BOJ Hems and Haws on QE Sending USD/JPY Lower

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Market Drivers December 20, 2012
BOJ eases 10TY but holds off on inflation target
UK Retail Sales miss
Nikkei -1.19% Europe -0.03%
Oil $89.58/bbl
Gold $1670/oz.

Europe and Asia:
CHF Trade Balance 2.95B vs. 2.21B
EUR German Producer Prices -0.1% vs. -0.1%
GBP Retail Sales 0.0% vs. 0.3%

North America:
USD GDP 8:30
USD Personal Consumption 8:30
USD Initial Jobless Claims 8:30
USD Philly Fed 10:00
USD Existing Home Sales 10:00
USD Leading Indicators 10:00
CAD Retail Sales 8:30

A very quiet night in currency markets with most high beta FX carving out narrow ranges in lackluster European trading as investors continue to wait for progress in the Fiscal Cliff talks. In Japan today the BOJ concluded its policy meeting and as expected increased its QE program by 10T Y although the composition of half JGBs and half T-bills was viewed by the market as having minimal impact on the balance sheet and therefore not that stimulative to the economy.

More importantly the BOJ shelved any discussion of inflation targets to its January meeting with Governor Shirakawa pointedly noting that fiscal discipline may loosen if Japan becomes accustomed to a long period of very low rates. The BOJ remains the key barrier to Prime Minister-elect Abe’s efforts to dramatically reflate the Japanese economy as it continues to pursues a cautious policy path.

To counterbalance the BOJ reluctance, a senior LDP official stated that they will decide on an emergency supplementary package by January 15th in order to further stimulate the Japanese economy through fiscal spending. However, BOJ’s half hearted efforts took their toll on USD/JPY which traded below 84.00 for most of the night hitting a low of 83.85 before rebounding slightly. The pair continues to consolidate after its massive month long rally and may drift lower to 83.50 as profit taking continues, especially if the Fiscal Cliff negotiations in US remain at an impasse putting a damper of risk appetite.

Meanwhile in UK the Retail Sales data disappointed, printing at 0.0% versus 0.3% eyed. The weaker than expected results occurred despite the fact that ONS reported that household goods showed their strongest gains since February 2010, driven by sharp rise in sales of tablet computers. UK final demand remains weak suggesting that forecasts of Q4 contraction are likely to be accurate. Nevertheless, cable shrugged off the news holding near session highs of 1.6260 as it continued to consolidate its recent gains.

We remain convinced that sterling is vulnerable to further selloff as UK economic data continues to disappoint and the country’s competitiveness deteriorates. UK is now the weakest exporter to China amongst the G7 countries and 22nd overall lagging such developing nations as Angola and Kazakhstan. As pound appreciates these negative dynamics will only be exacerbated. For now however the pair continues to be fueled by investor complacency and positive risk appetite but if UK economy shows no sign of improvement cable will start to lose its lustre as the new year proceeds.

In North America today, the eco calendar is full of data with weekly jobless claims likely the most important data point of the day.Many analysts have pointed out the recent correlation between jobless claims and US equity performance and last weeks much better than expected print no doubt contributed to the rally in stocks. Today the market eyes a big jump to 358K from 343K the week prior, but if the number once again prints below the key 350K mark it could fuel another ramp in risk assets as investors take heart in the fact that US economy continues to perform well despite the ongoing uncertainty over the Fiscal Cliff deal.

Boris Schlossberg
Managing Director

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