Japanese Yen Outperforms, Further Gains Ahead as Risk Aversion Persists

Key Overnight Developments

• Yen Bought as Asian Shares Decline on European Debt, Fed Beige Book
• Japanese Current Account Surplus Widens, Machine Orders Outperform
• Euro, British Pound Advance as US Dollar Retraces US Session Rally

Critical Levels

The Euro and the British Pound tracked higher in the overnight session, adding 0.2 percent each against the US Dollar as currency markets digested the greenback’s impressive rally in New York trading hours. We remain short EURUSD.

Asia Session Highlights

The Japanese Yen advanced in overnight trade, adding 0.4 percent on average against its top counterparts as stocks slumped across Asian exchanges, encouraging the unwinding of carry trades typically funded cheaply in the perennially low-yielding currency. The MSCI Asia Pacific regional benchmark index slumped 1.2 percent, following a drop on Wall Street amid renewed concerns about Europe’s debt woes as well as in anticipation of tomorrow’s release of the Federal Reserve Beige Book – a regional survey of economic activity around the United States – amid fears that the recovery in the world’s top consumer market (and Asia’s chief export market) is losing momentum.

Japan’s Current Account widened to 1675.9 billion yen in July, topping economists’ expectations and marking the first increase in four months. Imports plunged for the second month, sliding 3.4 percent, while exports posted the first increase in April, adding 1.8 percent. Meanwhile, Machine Orders surged 8.8 percent, more than quadrupling median forecasts and amounting to he largest increase since December 2009. The outcomes reinforces last week’s impressive capital spending figures, suggesting the nominally strongest Yen in 15 years is not proving to be a hurdle for overseas sales (at least for now), hinting the return of FX intervention may not be as close as Japanese policymakers would have the markets believe.

Still, the overall trend in export growth looks worrisome with cross-border sales adding 24.7 percent in the year from July 2009 to mark the smallest annualized increase in seven months. Looking past the exchange rate, the greater danger seems to be a broad-based slowdown in global activity, an outcome that looks increasingly likely after the JPMorgan’s Global PMI gauge of economic activity dropped to the lowest in six months in August. Japan’s recovery in the aftermath of the 2008 Great Recession has owed primarily to a rebound in overseas demand on the back of global stimulus efforts, with a widespread slowdown likely to weigh heavily on the island nation’s performance.

Euro Session: What to Expect

Germany’s Trade Balance surplus is expected to narrow to 13 billion euro in July as overseas sales stall to mark the worst performance in three months. The outcome follows yesterday’s disappointing factory orders figures, reinforcing fears that a slowdown in global demand will weigh heavily on the world’s second-largest exporter. An uptick in Industrial Production may offer a counter-balance, with output expected to add 1 percent in July, but orders figures are inherently more forward-looking and may prove to overshadow the release.

Meanwhile, UK Industrial Production is expected to add 0.4 percent, putting the annual growth rate at 2 percent. On balance, the annualized trend in industrial output has been treading water since March, hinting that the stimulus-driven rebound in the aftermath of the 2008 global credit crunch and recession may have run out of steam. The dramatic downturn in August PMI figures seems to reinforce this view, showing the manufacturing expanded at the slowest pace in nine months.

Turning to sentiment, S&P 500 stock index futures are down 0.2 percent in late Asian trade, pointing to continued risk aversion that promises to boost the safety-linked US Dollar and Japanese Yen against most other major currencies.

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