Risk FX was lower in Asian session trade but stabilized at the start of European dealing after steep selloff in yen crosses triggered by weak Australian housing data and a downgrade in economic assessment by the Japanese government. Japanâ€™s government on Tuesday lowered its overall economic assessment for the first time in 10 months in light of weaker industrial production and exports.
The report noted that, â€œThe movement toward an economic recovery will be affected by the decelerating overseas economies for the time being but is expected to continue due to reconstruction demand to some extent.â€ Japanâ€™s export demand has fallen markedly over the past several months due to slowdown in China and the EZ hurting the countryâ€™s prospects for growth.
The downgrade in assessment sent USD/JPY to 78.50 from 78.75 at the start of Asian trade and sent yen crosses tumbling as risk aversion kicked in. Sentiment was also affected by -5.6% drop in Australian New Homes sales which highlighted the difficulties of the countryâ€™s housing sector which was a major driver of growth over the past several years.
The Aussie dropped to 1.0350 but quickly found buyers at that level as option related activity provided support. The pair remains heavy as market concerns about growth in Asia Pacific continue to mount, and it may eventually drift towards the 1.0300 figure as the day proceeds if risk aversion flows accelerate in North American session.