Risk FX Rangebound Market Awaits EcoFin

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Market Drivers November 20, 2012
RBA minutes show “further easing may be appropriate ahead”
BOJ – Shirakawa rebuffs Abe
Nikkei -0.12% Europe -0.35%
Oil $88.71/bbl
Gold $1732/oz.

Europe and Asia:
AUD RBA Board Minutes – remains status quo
AUD Conference Board Leading Index -0.3% vs. -0.8%
JPY All Industry Activity -0.3% vs. -0.4%
CHF Trade Balance 2.82B vs. 2.32B
EUR Euro Area Finance Ministers Meet on Greece
EUR German Producer Prices 0.0% vs. 0.1%

North America:
USD Housing Starts 8:30

Asian and early European sessions was marked by very tight directionless trading in FX with most of the majors resting in 20 point ranges for most of the night. The euro stabilized at 1.2770 after selling off sharply in the wake of the Moody’s downgrade of France after the close of business yesterday. Moody’s negative analysis was only the latest salvo against France which many investors view now as “the sick man of Europe” that need structural reform in order to regain competitiveness.

Despite the credit concerns, markets generally shrugged off the news with French yields up only mildly by 2 basis points. Instead attention was focused on the EcoFin meeting this afternoon as markets awaited some resolution on the Greek bailout deal. It is unlikely that the EU ministers will have a definitive answer by the end of the day, but market consensus believes that a deal will be reached buying Greece more time to finance its fiscal operations.

In Japan today BOJ Governor Masaaki Shirakawa responded to the critics of the central bank by arguing that the institution must maintain its independence. At press conference following its monthly meeting Mr. Shirakawa stated that history shows the importance of maintaining an independent central bank. The comments were a sharp rebuke to Shinzo Abe, the leading candidate for next Prime Minister in the Japanese election who has been advocating for a much more accommodative monetary policy in coordination with fiscal authorities.

Taking on Mr. Abe’s primary proposal that the BOJ underwrite government debt, Mr. Shirakawa stated that such policy would lead to reckless money printing, adding that no OECD central bank has ever taken such stance. Mr. Shirakawa also noted that setting negative interest rates would discourage banks from seeking funds from BOJ in market operations. Finally Mr. Shirakawa stated that the 3% inflation target proposed by Mr. Abe was unrealistic.

Overall, Mr. Shirakawa’s press conference was a wholesale repudiation of Mr. Abe’s policy proposals sending USD/JPY lower to 81.13 with the FX market viewing BOJ Governor’s remarks as an argument for status quo. Mr. Shirakawa is expected to leave his post in May and one of Mr, Abe’s key policy initiatives is to replace Mr. Shirakawa with a much better ally at the helm of the central bank. For now however, it appears that the BOJ will not cooperate with Mr. Abe should he be elected in December, thus forcing him to wait in order to implement his more dramatic proposals.

Meanwhile in Australia, RBA minutes revealed that “”further easing may be appropriate ahead” weighing a bit on the Aussie which dragged all night long trading below 1.0400 level. Governor Stevens also remarked that he was surprised at the Aussie strength given the fact that terms of Trade peaked, but the currency is not trading on trade flows, but rather capital flows as its G-20 leading yield continues to attract investment, that’s why concerns about a possible rate cut in December may put a cap on any Aussie rally until the RBA meeting passes.

In North America today another slew of housing data from US with Building Permits and Housing Starts on the docket. Markets are once again expecting a bit lower figures than the month prior, but if they surprise to the upside like yesterday Existing Home sales data, they positive news could help extend the risk rally and push USD/JPY above 81.50 as the day proceeds.

Boris Schlossberg
Managing Director

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