US Dollar, Japanese Yen Diverge on Extreme Sentiment, Mixed US Economic Reports

US Dollar, Japanese Yen Diverge on Extreme Sentiment, Mixed US Economic Reports
The US dollar and Japanese yen diverged dramatically on Wednesday as USDJPY broken below 88.00 toward the 2008/2009 lows near 0.8710. At the same time, equities were up slightly, suggesting the move wasn’t necessarily the result of risk aversion. Rather, FXCM SSI – a contrarian indicator – shows that traders remain long USDJPY by a ratio of over 7:1, and with these extreme levels come extreme price action. Indeed, the US dollar was down across the majors, helping to push EURUSD to fresh 2009 highs above 1.51, amidst mixed US data. The Commerce Department said that US durable goods orders dipped 0.6 percent in October due primarily to weaker defense orders. However, nondefense aircraft orders were actually very supportive and excluding transportation, durable goods orders fell by 1.3 percent, the sharpest drop since March 2009. A further breakdown shows that non-defense capital goods orders excluding aircraft tumbled by the most since April 2009, which doesn't bode well for Q4 GDP as it suggests business investment is likely to lag further in coming months.

The Commerce Department also reported that US new home sales surprisingly rose 6.2 percent in October to an annual rate of 430,000. A breakdown of the report shows that inventories fell to 6.7 months from 7.4 months, which is similar to the drop in supply levels of NAR existing homes to 7 months from 8 months. Additionally, median new home prices rose for the second straight month to $212,200 from $210,700 and are now only down 0.5 percent from a year ago. On the other hand, we learned on Monday that median prices for NAR existing homes slipped to $173,100, down 7.1 percent from a year ago.

On the consumer side, personal spending jumped 0.7 percent in October, marking a turnaround from the 0.6 percent drop registered in September, as gains were led by purchases of durable goods like autos. Personal income grew for the fourth straight month, this time by 0.2 percent, even though the wage and salary component went unchanged. Instead, proprietors income, rental income, and transfer payments - such as government social benefits - led the way. Meanwhile, the final reading of the University of Michigan's consumer confidence index was revised up to 67.4 in November from 66.0, but this still reflects a decline from October, when the index hit 70.6. Looking into the revisions, sentiment on current economic conditions worsened while confidence in the economic outlook was not as bad as anticipated.

Euro Reaches Fresh 2009 Highs as ECB’s Nowotny Signals End of Liquidity Programs
The euro rallied against the US dollar, New Zealand dollar and British pound on Wednesday, but didn’t do much against the rest of the majors after GfK's measure of German consumer confidence fell for the second straight month to 3.7 in December from 4.0, suggesting that there are persistent concerns that growth can be sustained through the start of 2010. Meanwhile, European Central Bank (ECB) Governing Council member Ewald Nowotny told the Austrian parliament that "[m]onetary policy will make sure that the extraordinary measures will be phased out and the liquidity that was provided will be drained to avoid any risk for price stability in the medium and long term," adding to evidence that the ECB will allow their 12-month tender program to end in December. Nowotny also said that the Euro-zone's recovery could be impeded by rising unemployment and that it was too early to say that the recovery was already self-sustained.

Related: Discuss the Euro in the DailyFX Forum

British Pound Mostly Lower as UK GDP Shows Continued Contraction in Q3
The British pound may have ended the day up against the greenback, but the currency fell against most of the majors after the preliminary reading of Q3 GDP for the UK was revised in line with expectations to -0.3 percent from -0.4 percent, while the annual rate was revised to -5.1 percent from -5.2 percent.  A breakdown of GDP shows that private consumption went unchanged in Q3 after contracting for the previous five quarters, gross fixed capital formation (business investment) fell 0.3 percent, which was a much smaller decline than anticipated, while exports rose for the first rise since Q2 2008 and imports jumped 1.3 percent, marking the first increase since Q4 2007. Though the data doesn't fundamentally change the economic outlook for the UK, the cooling of the contraction in personal spending suggests consumers may be in a better position to contribute to growth in Q4.

Related: Discuss the British Pound in the DailyFX Forum

Australian Dollar Gains as RBA’s Battellino Issues Hawkish Comments
The Australian dollar and Canadian dollar were two of the stronger major currencies on Wednesday as commodity prices and equities gained slightly. Furthermore, Reserve Bank of Australian deputy governor Ric Battellino said that the Australian economic has entered a “new upswing” and that it’s “reasonable to assume we will see this growth extended for a few more years yet.” The RBA has already been one of the most aggressive central banks as the world’s biggest economies show signs of emerging from recession, as they have hiked interest rates twice this year by a total of 50 basis points to 3.50 percent. Even after these increases, Credit Suisse overnight index swap (OIS) rates are pricing in 142 basis point worth of additional hikes over the next 12 months. Furthermore, OIS rate are pricing in a 76 percent chance of a 25 basis point hike on November 30.

Related: Discuss the Australian Dollar in the DailyFX Forum

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com