Yen in Focus

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Includes: FXY, JYN
by: FXedu

By Mike Conlon

Overnight, an election in the ruling party of the Japanese government re-affirmed current PM Kan as the head honcho of the DPJ. However the challenger, Ozawa, was seen as someone who was willing to intervene in the currency, whereas Kan was not so the Yen is probing new highs as it is likely that Kan will be put to the test.

In the UK, CPI data came in higher than expected yet the Pound is slightly lower on a bit of risk aversion to start the day. However, home prices for the month of August came in much lower than expected, according to RICS.

In the eurozone, German investor confidence fell to 19-month lows as austerity measures and global economic uncertainty weighed heavily. However the survey of current conditions came in better than expectations.

In New Zealand, retail sales figures came in worse than expected and home prices also came in lower than expected.

However, US retail sales figures this morning came in better than expected, providing a little counter-balance to the risk themes.

In the forex market:

Aussie (AUD): The Aussie was lower to start out the morning on risk aversion despite the fact that business confidence figures came in at a 4-month high. This could put additional rate hikes back on the table for the RBA as the Australian economy appears to be doing quite well.

Kiwi (NZD): The same can’t be said of the New Zealand economy which is showing some weakness this morning as both retail sales figures and housing price figures came in worse than expected. Retail sales shrank .4% vs. an expectation that they would remain steady from last month. This comes after the GDP warning issued due to the earthquake; however the rebuilding could spur economic activity in the latter part of the 4th quarter. (Click chart to enlarge)

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Loonie (CAD): The Loonie started the morning weaker but is picking up a bit of steam despite marginally lower oil prices and risk aversion. Better than expected US retail sales figures help Canada, but weaker than expected Labor productivity figures offset gains in business output.

Euro (EUR): The Euro is also weaker this morning as the German ZEW investor confidence figures came in at -4.3 vs. an expectation of 10, which is a 19-month low for the reading. However the current situation figures came in better than expected at a reading of 59.9 vs. an expectation of 50. Industrial production figures came in lower as well, so we’re seeing a pullback.

Pound (GBP): The Pound is also lower on risk themes as RICS reported lower than expected housing prices, despite the fact that CPI figures came in at 3.1%, higher than the BOE’s target of 3% for the sixth straight month. Consumer confidence figures came in at 4-month highs. The Pound has traded in a wide range this morning. (Click chart to enlarge)

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Dollar (USD): There is mild Dollar strength this morning due to risk aversion, and at this point, better than expected US retail sales figures have not been enough to flip market sentiment. Advance retail sales came in at .4% vs. an expectation of .3%, and it shows that growth, while sluggish, is still happening.

Yen (JPY): Congratulations to Prime Kan, who managed to hang on to control of the DPJ. However, he was not “rewarded” by the market as the Yen moved to new 15-year highs vs. dollar. The market had determined that his challenger would be more likely to intervene in the currency and I have mentioned in previous articles that intervention may be difficult to pull off. However, the contrarian in me says that Kan may surprise the market by going ahead with intervention should the Yen continue to strengthen. (Click chart to enlarge)

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Every day that the Japanese Yen puts in a new high is a day that makes intervention more difficult. Global economic fear is a primary driver of Yen strength, yet we are nowhere close to the fear that we had earlier in the year when the Euro was under fire.

Meanwhile, there are pockets of global economic strength yet the fate of some of these stronger economies is out of their hands as growth is tied to larger, weaker economies.

Housing prices from around the globe are falling, yet the money supply has expanded. Accommodative monetary policy cannot force people to borrow, so the velocity at which the money moves is much slower thereby keeping inflation in check. At least that’s what the BOE keeps saying, despite the fact that CPI remains outside of the government target band.

So housing will continue to drag on economies as global economic fear keeps consumers from expanding their balance sheets and taking on excessive debt, while the banks attempt to shore up balance sheets and de-lever.

As we oscillate back and forth between risk themes, bear in mind that various data points can paint a different picture day by day so it is important to try to grasp the overall theme while taking advantage of trading volatility.

This way, you won’t need your own personal bailout!

Disclosure: None