Market Drivers for October 25, 2012
Yen weakens through 80.00 on speculation of BOJ QE expansion
UK GDP rips 1.0% on Olympics spending
Nikkei 1.13% Europe 0.47%
Europe and Asia:
GBP GDP 1.0% vs. 0.6% eyed
USD Durable Goods Orders 8:30
USD Chicago Fed Nat Activity Index 8:30
USD Initial Jobless Claims 8:30
USD Pending Home Sales 10:00
UK GDP aided by the London Olympics ripped to the upside printing at 1.0% versus . 0.6% forecast, fueling a rally in sterling that sent the pair through the 1.6100 barrier in early European trade. Despite the anticipation of strong results due to the inadvertent leak by Prime Minister Cameron yesterday in Parliament, todayâ€™s data was even better than expected as growth increased at the fastest pace since Q3 of 2007.
The UK GDP gains were led by strong consumer spending and on gains in Industrial Production which posted an increase of 1.1%. Construction however contracted sharply falling 2.5% on teh quarter.
Although the data was spectacular, the underlying growth stripping out the effects of the Jubilee and the Olympics was estimated to be a much more modest 0.3%. Some analysts has speculated that the latest quarterly results may cause the BOE to suspend its asset purchase program, but we believe that policymakers will look through the one off events and focus on the core 0.3% number which remains below trend.
In Japan speculation that the BOJ will increase its QE program helped to propel USDJPY through the 80.00 level. The NIkkei newspaper reported that the BOJ may consider expanding its asset purchase program by 10 trillion yen to 90 trillion yen at its next meeting at the end of this month.
The news sparked a rally in USDJPY which has been comatose for the past 48 hours, pushing the pair to 80.20 as its nascent uptrend continued. We have long argued that the only sustainable way for Japanese officials to weaken the yen would be to offset the massive QE program of the Fed with one of their own.
Up to now Japanese authorities have been reluctant to use the full force of monetary policy to impact exchange rates, but the latest economic data which has shown massive deterioration in the export sector, must have convinced them that some action was necessary. While 10 trillion yen which is approximately 125 Billion dollars, is considerably smaller than the size of Fedâ€™s program, it is nevertheless a meaningful commitment and will likely provide further impetus for USDJPY rally.
In North America today the focus will be jobless claims, durable goods and pending homes. After a series of beats, US economic data has started to wobble and therefore todayâ€™s reports could prove critical to the continuation of the risk trade. If numbers show that demand remains relatively robust high beta currencies should extend their gains while USDJPY will have 80.50 in its sights as the day proceeds