Market Drivers December 28, 2012
Sharp profit taking in USDJPY and EURUSD leads to early selloff
Japanese data shows further eco weakness
Nikkei up 0.70% Europe -0.28%
Europe and Asia:
JPY Unemployment rate 4.1% vs. 4.2%
JPY IP -1.7% vs. -0.5%
JPY Average Cash Earnings -1.1% vs. -0.4%
JPY Retail Sales 1.3% vs. 1.2%
EUR French Consumer Sentiment 0.2% vs. 0.0%
EUR Retail PMI 44.5 vs. 44.8
USD Chicago PMI 9:45
USD Pending Home Sales 10:00
Risk currencies saw a sharp selloff in early European trade, triggered by profit taking in EUR/JPY cross which was exacerbated by low volume holiday conditions. After spiking to a high of 114.70 in early Asian dealing, helped by a short squeeze in USD/JPY which took the pair to 86.60, EUR/JPY reversed sharply at the start of European trade falling more than 100 points off reported selling from Far East.
The relentless rise in yen pairs has now created massive overbought conditions in the whole yen complex and today’s profit taking selloff was long overdue. Yesterday’s end of the session news that House Speaker John Bohner will call the House back in session on Sunday sparked speculation that some sort of a compromise on the Fiscal Cliff may still be possible before the year end and helped fuel the risk rally in early Asia.
However, the positive sentiment did not last as prices have become so overbought that there was little enthusiasm to rally further. Once the selling began it quickly triggered stops across the board, taking EUR/USD below the 1.3200 level and USD/JPY below 86.00
On the economic front the calendar, as expected, was relatively light but the data out of Japan continued to show further deterioration. Industrial Production fell -1.7% versus 0.5% eyed while Average cash earnings contracted -1,1% versus -0.4% projected. Japanese Finance Minister Aso further confused the market by stating that policymakers will intervene in the market when speculation drives excessive gains or losses seemingly suggesting that the recent decline in the yen may have been too rapid.
His words however, may have been simply a political gesture to assure the world at large that Japanese officials are not seeking a wholesale debasement of their currency, when in reality they are. The decline in yen has been so quick that Japanese authorities may have felt the need to curb some speculative flows for the time being. However, we continue to believe that the government of Shinzo Abe would like to see USD/JPY above 90.00 by next year in order to stimulate the country’s moribund export sector.
In North America today the eco calendar carries Chicago PMI and Pending Homes sales data with markets expecting a rise in the former and a fall in the later. Trading flow however will likely be driven by further developments out of Washington DC although given the profit taking mood of the market any additional stumbling blocks to a deal are likely to push high beta FX even lower with EUR/USD testing 1.3150 support if risk aversion flows accelerate.