USD/JPY – This Time It’s Different?

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Market Drivers November 15, 2012
Yen crosses on fire after Abe comments
Aussie lags, euro leads as talk of Spanish bailout heats up, EZ GDP bit better
Nikkei +1.90% Europe -0.31%
Oil $86.00/bbl
Gold $1723/oz.

Europe and Asia:
AUD Consumer Inflation Expectations 2.2% vs. 2.6%
NZD Business NZ Performance of Manufacturing Index 50.5 vs. 48.5
EUR German GDP 0.2% vs. 0.1%
EUR Eurozone GDP -0.1% vs. -0.2%
EUR ECB Monthly Report
EUR Eurozone CPI 2.5%
GBP Retail Sales -0.8% vs. 0.1%

North America:
USD CPI 8:30
USD Initial Jobless Claims 8:30
USD Philly Fed 10:00
CAD Existing Home Sales 9:00
CAD BoC Review 10:30

Yen weakened significantly in overnight currency trading as comments by DPJ leader Shinzo Abe sparked a furious rally in USD/JPY taking the pair to a high of 81.25 in early European dealing. Mr. Abe who is expected to be the next Prime Minister stated that he prefers to see zero or sub-zero rate from the BOJ in order to end the nagging deflation that has dogged Japan for the better part of two decades.

Mr. Abe reaffirmed his preference for a very accommodative monetary policy coupled with strong fiscal spending increases in order to stimulate growth in the moribund Japanese economy. Mr. Abe’s comments fueled a massive rise in USD/JPY and yen crosses as currency markets sensed that Japanese authorities may have finally become serious about weakening the country’s currency which has been unnaturally strong for most of this year as QE programs by the Fed weakened the dollar.

By arguing for a massive QE program of its own, Mr. Abe is in effect asking the BOJ to offset the negative impact of Fed’s QE actions on the yen. Analysts who have been calling for a USDJPY breakout have been disappointed numerous times this year, as actions by Japanese monetary authorities has proven to be woefully inadequate to adjust the exchange rate. However, should Mr. Abe be elected on this platform, the BOJ may become much more aggressive in its actions and the upside break in USD/JPY could hold. For now the 81.50 level is the next resistance as the rally continues to gather steam.

Elsewhere in UK Retail sales missed their mark, printing at -0.8% versus -0.1% eyed putting pressure on the pound in early London trade. The fall was the sharpest decline since April and raised the possibility that UK GDP may contract once again in Q4 of this year.

The fall in consumer spending was driven primarily by drop in sales of food, clothing and footwear. Headline volumes rose only 0.6% on a year over year basis suggesting that the overall trend is flat. Food sales which make up 41% of overall sales led the drop falling by 0.6% on the month.

Today’s weak Retail Sales data is the second disappointing economic reports this week, after jobless claims ticked up yesterday painting a bleak picture of the UK economy that was reaffirmed by Governor Mervyn King. He noted that UK may once again contract in Q4 of this year and today’s weak Retail Sales results confirm that view.

In North America today, the market will get a look at weekly jobless claims and the Philly fed numbers with both data points expected to be weaker. Equities have been a drag on risk all week long and if today’s numbers cause another selloff in stocks, currencies may follow, especially Aussie which has been a major laggard overnight and may drift towards the 1.0300 level if risk aversion flows pick up.

Boris Schlossberg
Managing Director

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