Market Drivers for December 13, 2013
Yen takes out yearly highs but can’t hold them
Aussie finds bids ahead of 8900
Nikkei 0.40% Europe 0.27%
Oil $97/bbl
Gold $1225/oz.

Europe and Asia:
JPY Revised IP 1.0%
EUR German WPI -0.2% vs. 0.4%

North America:
USD PPI 8:30

USD/JPY hit fresh yearly highs, rising as high as 103.90 in Asian session trade, but could not hold that level backing off to 103.40 in morning European dealing. The pair put in a very impressive recovery in yesterday’s North American session off the back of better than expected US Retail Sales numbers and today price action appears to be momentum driven as spec accounts tried to run stops at prior yearly highs. However, the offers at 104.00 continue to cap the rally in the pair and it may remain rangebound until 10 o’clock New York time when option orders expire.

There is little doubt that the price action in the pair this week is being driven by technical rather than fundamental factors as newsflow has been scant and market expectations regarding an early Fed taper have not really changed. The consensus view is that the taper will occur at the earliest in January and perhaps may even be pushed back until March as US monetary officials seek certitude regarding the pace of the US recovery.

One key factor that is keeping Fed officials relatively complacent regarding the change in policy is the very low US inflation rate. Today the market will get a glimpse of the US PPI numbers with consensus calling for PPI to rise to 0.0% from -0.2% the month prior while core PPI is expected to actually decline to 0.1% from 0.2% the period past.

With price pressures essentially non-existent the Fed can easily take its time in changing policy course, but with US economy clearly improving Ms. Yellen and company will have to act sooner rather than later as the QE buying program is now consuming a greater and greater portion of the country’s shrinking deficit. The Fed’s primary focus is job growth and to that end the expectation that US will exceed its highest ever level of employment sometime this year, should provide policymakers with confidence to begin curtailing the QE program.

In short, it appears the the cycle of extraordinary US monetary accommodation is coming to an end and that in turn should translate into a stronger USD/JPY over the intermediate term horizon. With the pair now having breached the yearly highs, it looks to be on a path towards the 105.00 figure before the year end.