Is USDJPY Headed Back to 81.00?

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Market Drivers for November 19, 2012
Risk FX mildly higher on Fiscal Cliff Resolution hopes
EZ Construction output sinks -2.6% vs. -1.4%
Nikkei 1.43% Europe 1.28%
Oil $87.87/bbl

Europe and Asia:
JPY Leading Index 91.6 vs. 91.7
JPY Machine Tool Orders -6.7% vs. -6.7%
NZD Performance Services Index57.4 vs. 49.9
NZP PPI -1.0% vs. 0.3%
GBP Rightmove House Prices -2.6% vs. 3.5%

North America:
USD Existing Home Sales 10:00

Risk FX was mildly higher on the first trading day of the week,as enthusiasm over the prospect of resolving the US Fiscal Cliff budgetary deadline fueled a rally in Asian and European trade. On Friday afternoon US lawmakers made conciliatory comments on the matter which turned risk sentiment higher and that momentum has extended into today so far with Aussie reacting best of all as the pair circled in on the 1.0400 handle in midmorning European dealing.

Otherwise the economic calendar was exceedingly quiet with only a smattering of New Zealand data on the docket which showed that PMI rose to 57,4 from 49.9 the period prior while PPI sunk by -1.0% versus 0.3% forecast. In Europe the economic signals continued to show weakens with construction output contracting by -2.6% versus -1.4% the period prior as economic activity in the region continues to hemorrhage. Tomorrow the EcoFin meeting is expected to discuss the bailout situation in Greece, but the sovereign debt issue may no longer be the key policy driver in the region as concerns over economic growth take center stage.

The recent spate of EZ eco data is clearly pointing to a recession in the region that may now spread into the core economies of Europe. With unemployment at record highs and growth anemic, EZ policy makers may have to abandon their hard line stance on austerity or risk the prospect of a much more severe recession in 2013. Furthermore with US authorities now focused on resolving the Fiscal Cliff issue, North America may no longer be able to act as the driver of global growth.

As we noted earlier,”The policy solutions to the Fiscal Cliff all revolve around the idea of lowering government spending and increasing a variety of taxes. In short, Fiscal Cliff has simply become a code word for austerity politics. Austerity politics depresses aggregate demand and only exacerbates economic hardship. US may be in the process of repeating the mistakes on 1938, when a modest recovery convinced US policymakers to tighten fiscal spending by “balancing the budget” and sent the country into the second wave of the Great Depression.”

Of more immediate concern, the US calendar today is also relatively barren as we enter the holiday shortened week, but housing will be the key focus of the day as Existing Home Sales and NAHB housing index all hit the tape at 1500 GMT. Markets are expecting little change in housing demand with most forecast looking for a repeat of the 475K run rate. However if the data disappoints it may put further pressure on USDJPY which reversed in European trade after taking out the 81.50 barriers in Asia. With the pair now sitting at 81.19 it may test support at 81.00 later in the day as further profit taking kicks in.

Boris Schlossberg
Managing Director

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