Shirakawa Puts a Halt to USD/JPY Rally

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Market Drivers For Dec. 3, 2012
Euro rallies as sov debt yields decline
Aussie Retail Sales miss, UK PMI beats
Nikkei 0.13% Europe 0.43%
Oil $88.88/bbl
Gold $1720/oz.

Europe and Asia:
AUD AiG Performance of Manufacturing Index 43.6 vs. 45.2
AUD TD Securities Inflation -0.1% vs. 0.1%
AUD Retail Sales 0% vs. 0.4%
JPY Capital Spending 2.4% vs. 1.0%
NZD Terms of Trade Index -3.2% vs.1.0%
CHF Retail Sales 2.7% vs. 3.8%
CHF SVME Purchasing Managers Index 48.5 vs. 47
GBP Purchasing Manager Index Manufacturing 49.1 vs. 48

North America:
USD ISM Manufacturing 10:00
USD Construction Spending 10:00
USD ISM Prices Paid 10:00

Euro was higher at the open of week’s trade rallying to 1.3048 in Asian dealing as the pair was boosted by better risk sentiment that pushed periphery sovereign debt yields to their lower levels since spring. Overnight a series of global PMI showed that conditions had stabilized, although remained in contractionary mode for most of the G-20 economies. In China the HSBC PMI reading registered its 2nd consecutive value above the 50 boom/bust level although at 50.6 it was a tad lower than the 50.8 expected.

Meanwhile in Europe the EZ final PMI Manufacturing printed at 46.2 in line with expectations while in UK the PMI data beat at 49.1 versus 48 forecast. In UK the increase in demand for consumer goods helped to offset further decline in export orders. The news suggests that the pace of contraction in manufacturing across Europe may have eased, but the sector remains in negative territory and is likely to weigh on growth in Q4 of this year.

Nevertheless investors were relieved as two of the primary risks on the global horizon – the slowdown in China and the escalation of the sovereign debt crisis in Europe appear to be receding. The news helped drive EZ sov yields to fresh recent lows with Germany receiving a negative yield of -1.68% at its T bill auction.

The one currency that lagged the market was the Aussie where Retail Sales missed their mark badly printing at 0.0% versus 0.4% eyed prompting speculation that the RBA may cut rates by a more dramatic 50bp rather than 25bp priced in. Australian Retail sales were flat in November as consumer spending slowed to a crawl amidst signs of weaker labor markets. ANZ job advertisements, an early measure of labor demand, also weakened contracting by -2.9% in October.

Australia’s retail sector is the second largest in the country’s economy representing 10.5% of all activity and it has seen growth essentially flatline over the past 3 months. The news bodes poorly for overall growth in Q4 as slowdown in demand from China is clearly making its presence felt Down Under. Saturday’s HSBC China PMI reading which printed above 50 for the second month in a row, helped offset some of the concerns, but the growth in China is barely above the boom/bust line and is unlikely to help stimulate demand for Australia going forward.

The weak Retail data has spurred speculation that the RBA may opt for a larger 50bp cut at it next meeting this Wednesday. We think that’s unlikely, given the generally gradualist approach of the Australian monetary authorities. Furthermore, a bigger cut in the benchmark rate could only aggravate the overheated real estate market where the majority of mortgages are variable rate. However, the central bank has been consistent in its assessment that the Aussie remains overvalued and a 50bp cut would undoubtedly put downward pressure on the unit. The Australian dollar remains the key carry currency in the G-20 universe but if its benchmark rate is cut to 2.75% the spread between the AUD/USD and the rest of the block will have compressed significantly making it far less attractive going forward.
In North American session today, the focus will turn on US PMI data with ISM report expected to at 51.7 versus 52.4 the month earlier. Given the decline in Chicago PMI reading and the possible impact of hurricane Sandy, the data could surprise to the downside, but unless the miss is substantial its unlikely to have much market impact today.

Finally, USDJPY has drifted lower breaking the 82.00 barrier before rebounding slightly as BOJ Governor Shirakawa continued to resist Abe’s calls for more dramatic policy action. Mr. Shirakawa stuck to his gradualist approach noting the the central bank must maintain its mandate of price stability. Given BOJ independent powers that are unlikely to be amended by the Japanese parliament it appears that Mr. Shirakawa will block any of Mr. Abe’s proposals until he leaves his post in May. That’s likely to cause a stalemate in Japanese policy and is the reason why the USD/JPY rally is starting to run out of gas.

Boris Schlossberg
Managing Director

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