Capital Markets' priority focus seems to be on the past weekend's Japanese election results. In the aftermath, the yen has managed to plummet outright (given up a tad since) after the Liberal Democratic Party won a landslide victory in Sunday’s elections. Previously, a global financial meltdown, a Tsunami or even a nuclear mishap had not been able to weaken yen significantly. This time around, the yen bears are pinning their hopes on the strong majority win by the LDP, a win that could signal a period of aggressive easing by the BoJ.
Market focus should remain mostly with Japan in the aftermath of the LDP sweeping victory and ahead of the BoJ meeting this Thursday, where a further boost to QE is expected. Despite this being the last reliable week of “real” trading for 2012, do not be surprised to see outlier-trading spikes to be fueled by illiquid trading conditions as the U.S. budget saga continues. The fiscal cliff negotiations will remain, to many, the key focal trading point until the "turn." However, positional shifting from some Republicans offers the market some hope that negotiations will be less “intransigent.”
To date, the “big” dollar has managed to appreciate +5.1% against the yen over the past month. This has certainly been a one-way directional trade fueled by the yen bears belief that a government will speed up an aggressive easing policy by the BoJ. In the immediate aftermath, the election results suited the bears, however, the Y84.50 barrier has held. The dollar rally suggests that some speculators are willing to add to they already yen "short" positions. Near the overnight dollar top, exporters have been seen selling along with some speculators willing to book a little profit. Currently, the lack of deep dips is leaving some bears very confident about their dollar "long" positions.
Further short-term yen event risk of note will be the BoJ meet this Thursday and the government cabinet announcement on December 26. Spare a thought for the hapless BoJ, they have been easing all year and have put little dent into the yen’s persistent strength. What can they do that will have a material effect? Buy foreign bonds perhaps? This is certainly a solution and one that would garner strong resistance from the MoF and the Japanese government.
Euro data this morning shows that Italy managed to run a trade surplus of +EUR2.5b in October as exports rose +12%, y/y, while imports rose only +0.9%. Previously, a year ago, Italy had a –EUR1.1b deficit for the same month. Ex-energy, of which Italy is highly reliant on, then the country ran a trade surplus of +EUR7.6b and +EUR60b in the first ten-months of the year. Taking the 17-member union as a whole, the EU saw exports fall in the same month, adding to signs that the bloc continues to weaken in Q4. Seasonally adjusted exports fell -1.4% from September to October, while imports rose +0.6%. Analysts note that the EU economy fell back into a recession in Q3 after shrinking for six-consecutive months. This data confirms that the negative trend persists heading into Q4.
Today’s “Teflon” currency, or the EUR to some of us, remains unaffected by any negative data and continues to climb as we go deeper into the holiday season. Last Friday’s mid-morning North American bounce was fueled mostly by a London fix and some year-end demand for the single unit. It seems that this market has chosen, once again, to focus on a fresh proposal from Republican House Speaker Boehner as a possible breakthrough in the U.S. budget negotiations, although time is steadily running out for either party.
The EUR bulls are betting that the single unit could grind to 1.34 as the bears have been left battered chasing a falling EUR this quarter. There are no signs that the market is a willing selling off EUR’s ahead of year-end, thus leaning towards a painful grind higher to a resistance level where there is common interest to want to sell the single currency outright. Daily momentum remains positive, highlighting the overall upside potential. The first resistance of choice is around 1.3280.