What Will BOC Do Today?

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Market Drivers October 23, 2012
Risk aversion dominates early Europe
Spain sells 3.53B vs. 2.5B planned bills
Nikkei 0.04% Europe – 0.74%
Oil $88.41/bbl
Gold at $1718/oz.

Europe and Asia:
AUD Conference Board Leading Index -0.8% vs. 0.0%
EUR EZ Consumer Confidence n/a
GBP BBA Loans for House Purchase 31.2K vs, 30.9K

North America:
Canadian Retail Sales 8:30
BOC 9:00

A modest wave of risk aversion swept early European trade today sending high beta currencies slightly lower before they stabilized at lower levels. On a night when economic data and geo-political news was sparse currencies took their cue from equities which traded down nearly -1% before evening out as the morning wore on.

Spain conducted an auction of Treasury bills selling 3.5B of 2.5B targeted but despite the larger than expected demand yields on the three month rose to 1.45% from 1.25% in September. However the six month yield declined to 2.1% from 2.3% the period prior. The mixed results reflect the continued investor uncertainty as the status of Spanish sovereign fiscal policy with markets still awaiting action by Prime Minister Rajoy to formally ask for a bailout from EU. The decline in Spanish yields in the wake of ECB’s OMT announcement may have now reached bottom as investors are unwilling to bid up the assets further until some resolution is evident.

USDJPY squeaked higher in morning Asian trade to take out the psychologically important 80.00 barrier but stalled right at that point and fell back into the 79.80’s at the start of European dealing as risk aversion flows set it. Finance minister Koriki Jojima denied a local press report that said the government is asking the Bank of Japan to boost its asset buying program by Y20 trillion to Y100 trillion.

Despite the protestations many analysts believe that Japanese officials will become much more assertive on the issue of currency devaluation as the country’s export position continues to deteriorate. Since 2008 they yen has appreciated massively against most of the G-20 currencies including 65% against the euro and 30% against the yuan severely hampering Japan’s ability to compete in global markets as its domestic economy remains mired in deflation. The country just reported the worst trade figures in 30 years as the combination strong currency and conflicts with China depressed exports. Japan’s car sales in China – its biggest export market – tumbled by more than -14% in September.

Therefore there is growing pressure on the BOJ to vastly expand its QE programs in order to offset the aggressive currency devaluation from the Fed and the ECB. Up to now Japanese monetary policymakers have only taken tentative steps in that direction and a result the yen has continued to appreciate even as Japan’s economy sinks deeper into stagnation. The latest rally in USDJPY has been based largely on speculation that Japanese officials will finally being so passive on the monetary front, but if they continue to procrastinate the up move will be unwound much like all the other false rallies this year.

In North America today the US calendar is barren but, Canada has both Retail Sales and the BOC decision which could prove crucial to the loonie. Over the past several weeks the Canadian dollar has weakened on a relative basis as Governor Carney hinted that the accommodative monetary policy is unlikely to be tightened any time soon. If Mr. Carney makes no mention of “withdrawing stimulus” in his official statement the loonie could spike to parity on the news.

Boris Schlossberg
Managing Director

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