Risk FX Corrects in Quiet Trade

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Market Drivers November 16, 2012
Very quite consolidation session
Abe once again calls for more aggressive BOJ
Nikkei 2.20% Europe -0.78%
Oil $85/bbl
Gold $1708/oz

Europe and Asia:

North America:
USD Industrial Production 9:15
USD Manufacturing (SIC) Production 9:15

It been a very quiet consolidative session in FX market on the last trading day of the week, marked by some profit taking in long USD/JPY positions and some selling of euros amidst a very empty economic calendar and little fresh news on the geopoltical front.

The EUR/USD dropped through the 1.2750 level as a result of some sales in EUR/JPY earlier in Asian trade. The recent rally in the pair has been dictated far more by EUR/JPY flows rather than any positive news on the EZ front. Today calendar saw very little data with only the EZ Trade balance on tap.

EZ Trade data beat estimates printing at 11.3B versus 106.B eyed. The Trade surplus hit a record high in September but its was driven by lack of imports rather than increase in exports. Imports fell by 2.7% while exports declined by 1.1%. The news suggests that aggregate demand continues to wane in the EZ as the region faces the prospect of recession in Q1 of 2013 due to the austerity policies imposed on most of the Continent.

Japan dissolved its ;lower Parliament today as it prepared for elections and LDP leader Shinzo Abe reaffirmed his call for a more aggressive monetary policy, but USD/JPY remained under pressure for most of Asian and European trade today dropping through the 81.00 level. Mr. Abe once again said that he consider changing the BOJ law in order to encourage more aggressive QE measures.

Prime Noda however, who is expected to be Mr. Abe’s rival in the election stated that if the government were to set monetary policy steps it would hurt the independence of the central bank. The election promises to be a sharp contrast between the much more assertive style of Mr. Abe and the more traditional gradualist approach of Mr. Abe.

After several days of strong rallies, USD/JPY however failed to follow through as the 81.50 level proved to be too much for the pair and profit taking kicked in. One other possible reason for the weakness in the pair is the decidedly dovish stance of the Fed. Wednesday’s FOMC minutes showed that the US monetary policy will remain highly accommodative for the foreseeable future and will act as a counterweight to any USD/JPY rally.

Still Mr. Abe’s stance is the first sign of serious attempt to realign Japan’s ineffective monetary and exchange rate policy and if he is elected the markets will likely give him the benefit of doubt propping up USD/JPY for the time being. For now the pair is consolidating its recent gains with 80.65 now the key support level for the bulls that must hold in order to keep the recent rally going.

With no major data from North America the quiet consolidation tone may continue for rest of the day. If equities sell off in North American trade, the euro may correct once again back towards the 1.2700 level especially if yen crosses see further profit taking as the day proceeds.

Boris Schlossberg
Managing Director

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