USDJPY Reverses Gains As Global Markets Sink

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Market Drivers October 8, 2012
World Bank cuts forecast for East Asia and China sending risk lower in Asian trade
USDJPY unwinds all of its post-NFP gains
Nikkei 0.44% Europe -1.13%
Oil at $88.50/bbl
Gold at $1772/oz.

Europe and Asia:
AUD ANZ Job Advertisements -2.8% vs. -2.4%
CHF Unemployment Rate 2.9% vs. 3.0%
CHF CPI 0.3% vs. 0.3%
EUR German Trade Balance 18.3B vs. 15.8B
EUR German Industrial Production
EUR Eurozone Sentix Investor Confidence -22.6 vs. 20.6

North America:

A decidedly risk off feel to the start of the trading week with EURUSD dropping all the way down to 1.2955 in morning European trade while USDJPY erased all of its post NFP gains sinking back towards the 78.00 figure as the day wore on.

Part of the dour sentiment was attributed to a report by World Bank which lowered its forecasts for East Asia and China warning that the slowdown may be more severe than most analysts believe. “Unlike the rest of the region, China is experiencing a double whammy — the growth slowdown is driven by weaker exports as well as domestic demand, in particular investment growth,” World Bank Chief Economist for East Asia and the Pacific Bert Hofman said at a briefing in Singapore.

The World Bank slashed its estimates for Chinese GDP from 8.2% to 7.7% in 2013 noting that ambitious investment plans announced by several local governments in China could face funding constraints, “not least because governments are feeling the pinch of a cooling real estate market, which lowers land sales revenues”.

The news had a dramatic impact on risk flows with USDJPY dropping to a low 78.11 in a cascade of stop orders as many trapped longs from Friday bailed out of their positions. The pair has been a graveyard for longs who have tried to call a turn in the cross and today’s action was no exception to that rule. After rising to 78.88 in post-NFP fueled rally USDJPY has once again failed to hold its gains and failed to break out above the key 79.00 level.

Meanwhile Japanese officials appear to be in disarray with new finance minister taking a post for the third time in a year. One of the greatest ironies in the FX at the present time is that the more hapless the Japanese government, the worse the economic performance, the stronger the yen becomes. For now the pair remains above the key support at 77.50 but unless it can break out above and hold the the 79.00 level it will remain rangebound for the foreseeable future.

In North America today with both US and Canada on bank holidays, liquidity maybe scarce and high beta currencies could drift lower especially if North American equities follow the selloff in Europe. All eyes will be on the Eurogroup meeting which will discuss the ESM setup and the situation in Spain and Greece, but no immediate actions are expected.

Boris Schlossberg
Managing Director

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