US Dollar, Japanese Yen Extend Gains as Dubai Credit Scare Sinks Risky Assets

Key Overnight Developments

• Japanese Officials Step Up Intervention Threats as Yen Pushes Higher
• US Dollar Surges Against Most Majors as Dubai Scare Sets Off Risk Aversion
• Japan’s Jobless Rate Declines For Third Month as Workers Exit Labor Force

Critical Levels



The Euro and the British Pound shed as much as 0.8% and 0.9% respectively against the US Dollar as the safe-haven currency surged broadly higher amid broad-based risk aversion (see below). We remain short GBPUSD at 1.6648.

Asia Session Highlights



A sharp upswing in risk aversion layered over thin liquidity around the US Thanksgiving holiday made for an extremely volatile session in Asian trading. The dominoes began to fall as Australia’s ASX/S&P 200 benchmark equity index opened nearly 3% lower on news that Dubai was seeking to suspend international debt payments. Japan’s Nikkei, Hong Kong’s Hang Seng, and Asia’s other top exchanges would soon follow with hefty losses of their own. The safety-linked US Dollar and Japanese Yen raced higher, with the latter effortlessly slicing through resistance to hit a high of 85.76 against the greenback, a new 14-year high. The US unit scored as well, rising against every major currency other than the Yen to trade 1.3% higher on average.

Japanese officials quickly returned to the wires as USDJPY collapsed, stepping up threats of imminent intervention to check their buoyant currency. Japan’s Financial Service Minister Shizuka Kamei urged an international response to the Yen’s sharp move higher, and Finance Minister Hirohisa Fujii said he was watching the market “constantly” and would contact the US and Europe to address any “abnormal” currency moves. These efforts went by seemingly unnoticed until Deputy Prime Minister Naoto Kan was quoted as saying that abrupt Yen gains will hurt the economy and bluntly promising that the government will “take the necessary steps” in the currency markets based upon recent moves, hinting at a commitment to intervention and sending USDJPY higher, although Cabinet Secretary Hirofumi Hirano would later deny that anything tangible actually took place.

On the economic data front, Japan’s Jobless Rate unexpectedly fell for the third consecutive month to register at 5.1% in October. However, a look beyond the headline figure reveals an outcome that is far from encouraging. Workers that are defined as “unemployed” must be out of job but actively seeking one. This means that if labor market conditions are such that a good deal of workers becomes so discouraged with finding employment as to give up looking, these people are excluded from tallying the labor force (the sum of employed and unemployed workers) altogether, which can deceptively bring down the jobless rate. This is precisely what seems to be happening in Japan. Indeed, the overall number of employed workers fell 0.3% while the number of those not in the labor force rose 0.9%, the most in over eight years.

Separately, the Consumer Price Index fell slightly more than economists expected, shedding -2.5% in the year to October. However, stripping out the impact of volatile items such as energy and fresh food, prices fell by a much more forgiving -1.1%, bolstering the central bank’s argument that deflationary pressure will moderate as the run-up in commodity prices from March 2009 begins to filter down into annual CPI readings.


Euro Session: What to Expect



The European economic calendar looks largely uneventful, with Euro Zone Economic and Consumer Confidence rising for the eighth consecutive month in November. Both metrics bottomed in March and have closely tracked the rebound in equity markets as record-low interest rates and close to $2 trillion in worldwide fiscal stimulus efforts began to slow the slide in global economic growth. A similar pattern is seen in the Switzerland’s KOF Leading Indicator. On balance, this is a familiar story and one that has had ample time to be priced into exchange rates. Indeed, the markets seem far more concerned with questions about the sustainability of the recovery once interest rates invariably reverse course higher and the flow of government cash dries up.

Risk trends seem to be far more critical to shaping price action at this point, and all signs are pointing to continued gains for the US Dollar and Japanese Yen as Asian stocks sink to session lows and both European and US equity index futures trade deeply in negative territory.


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