USDJPY Breaks 78.00 as Fears of QE3 Grow

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Market Drivers Sept. 11, 2012
German court reaffirms that decision will come tomorrow
UK Trade Balance improves markedly
Nikkei -0.70% Europe -0.30%
Oil at $96.50/bbl
Gold at $1733/oz.

Europe and Asia:
AUD NAB Business Confidence -2 vs. 3
JPY BSI Large All Industry 2.5 vs. -6.1
GBP RICS House Price -19% vs. -22%
GBP Visible Trade Balance -7.1B vs. -8.9B

North America:
USD Trade Balance 8:30
CAD Housing Starts 8:15

Risk FX remained in a state of suspended animation as traders awaited the German constitutional court ruling due tomorrow. The court reaffirmed that it will not delay its judgment due to fresh challenges brought before by anti-euro politicians and that news helped to push EURUSD back towards the 1.2800 level. Although doubt still persist as to the outcome of the judgment, most German legal scholars are convinced that the court will approve the ESM structure, although it may impose conditionality on the bailout fund that may hamper its ability to function freely.

In UK today the Trade Balance printed much better than forecast coming in at -7.1B vs. -8.9B eyed as exports skyrocketed by 9.3% led by surge in oil and diamonds. Even excluding oil and diamond exports the Trade deficit narrowed to 6.725B from 8.433B – its best reading since December 2009.

The surprising strength in UK trade was also driven by an increase in exports with non -EU countries which climbed by 11% while imports fell by 5.3%. The improvement in UK trade balance bodes well for growth in Q3 of this year as the marked reduction on deficit will likely contribute positively to GDP.

Cable was steady in morning London trade holding above the key 1.6000 level but failed to make much progress in the aftermath of the release as offers at 1.6300 capped the rally for the time being. Risk currencies remain in a state of suspended animation as traders await the ruling of the German Constitutional court due out tomorrow, but if risk appetite awakens in North American session sterling will likely mount a run towards the 1.6050 level given today’s positive fundamental news.

Meanwhile USDJPY continued to drift lower breaking below the key 78.00 barrier for a brief moment but rebounded on macro fund demand. The pair is now coming to critical support territory as traders position themselves ahead of the FOMC meeting this Thursday. Although we continue to doubt that Fed will commit to QE3 at this time, the pressure on USDJPY remains intense and any surprise action by US monetary could trigger a move to test all time lows in the pair.

In US today the eco focus is on the Trade Balance and economic optimism survey neither of which is likely to have any impact on trade. Markets anticipate a slight deterioration in the Trade picture and an improvement in sentiment. However, if sentiment readings disappoint and print weaker than the month prior the downward pressure on USDJPY could continue as fears of QE3 increase.

Boris Schlossberg
Managing Director

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