Risk FX Rallies Ahead of US Retail Sales

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Market Drivers for November 14, 2012
Noda dissolves Parliament calls for election sending USDJPY towards 80.00
Italian auction at lowest rate in 2 years, BOE hawkish on inflation
Nikkei 0.04% Europe 0.06%
Oil $85.76/bbl
Gold $1725/oz.

Europe and Asia:
AUD Westpac Consumer Confidence 5.2% vs. 1.0%
NZD Retail Sales Ex Inflation -0.4% vs. 0.4%
CHF ZEW Survey (Expectations) -27.9 vs. -28.9
EUR Eurozone Industrial Production -2.5% vs. -1.6%
GBP BoE Inflation Report warns that inflation may last longer than expected
GBP Jobless Claims Change 10K vs. -0.5K
GBP ILO Unemployment Rate 7.8% vs. 7.9%

North America:
USD Advance Retail Sales 8:30
USD PPI 8:30
USD Retail Sales Ex Auto & Gas 8:30
USD Business Inventories 10:00
USD Fed Releases Minutes Oct 23-24 FOMC 14:00

Risk currencies were higher in early European trade with the exception of cable which tumbled in the wake of hawkish remarks by BOE Governor Mervyn King as he delivered his quarterly report. The BoE slightly increased its inflation report to 1.9% in three years versus 1.8% previously forecast after yesterday much hotter than anticipated CPI numbers indicated that price pressures continue to persist in the UK economy.

More importantly, Mr. King noted that UK faced a difficult combination of below growth trend and above-target inflation which could hobble the economy in 2013. The BoE Governor stated that if the unfavorable environment persists it would be very hard for UK economy to grow without some further fall in the real exchange rate. Sterling promptly tumbled on those comments dropping to 1.5860 from the session high of 1.5900.

Despite the evident inflationary pressures Mr. King reaffirmed his commitment to QE and noted that the central bank has not lost faith in the policy, although the MPC has not decided if any additional asset purchases will be made. The net takeaway from Mr. King’s comments is that UK monetary policy makers would clearly like to see a lower exchange rate for the currency and to that effect sterling may now remain under pressure. However, in an offsetting trend the unit continues to attract safe harbor flows from EZ investors and therefore may not weaken much if EZ credit crisis worsens.

The EURUSD meanwhile rose steadily throughout the night boosted by the strong Italian auction which saw yields on the 2023 BTPs drop to 4.81% from 5.89%, although the bid to cover declined to 1.51 vs. 2.33 the period prior. The pair continues to consolidate above the 1.2700 level as markets await the resolution of the Greek bailout payments, but the economic backdrop in Europe continues to deteriorate. Today’s EZ IP data which saw a decline of -2.5% vs. -1.6% eyed was only the latest eco data point to disappoint. Still the pair may drift towards the 1.2800 level as the day proceeds on short covering flows.

In Japan USD/JPY soared in Asian and early European session breaking through the key 80.00 level while taking all the yen crosses markedly higher after Prime Minister Noda announced that he would dissolve the lower house of the Diet and call snap elections in early December, The opposition leader Shinzo Abe agreed to the idea in exchange for an plan to reform and cut parliamentary seats.

Mr. Abe stated that should LDP recapture power it would make an utmost effort to defeat deflation by expanding fiscal spending while advocating a much more aggressive monetary policy. Among the measures that Mr. Abe proposed were revising the BOJ law so that the government may have stronger influence over the selection of a new Governor and direction of monetary policy.

It is clear that Japanese fiscal officials are frustrated with BOJ’s timid attempts at QE which have failed so far to halt yen’s strength hurting the country’s vital export sector. Mr. Abe appeared to be advocating an open-ended monetary easing policy with few limits in sight that would serve as counterweight to Fed’s massive QE programs. Such an approach could help USDJPY rally further, especially if US yields begin to rise.

In North America today the eco calendar brings US Retail Sales with markets expecting a very modest rise of 0.2% due to hurricane Sandy effects that sidelined most the Eastern seaboard for a week. Still the weekly numbers have been strong and there may have even been some pull forward of demand as consumers stocked up ahead of the storm. If the number does beat expectations the move in USDJPY could extend towards the 80.50 level as the day proceeds.

Boris Schlossberg
Managing Director

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