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Forex: Yen Gains, Euro Sinks on Political Jitters in the US and Italy

By , Currency Strategist
30 September 2013 07:05 GMT

Talking Points

  • Yen Rallies on Haven Demand as US, Italian Politics Drive Risk Aversion
  • Soft CPI Data May Set Dovish Tone for ECB Bets, Compound Euro Selling
  • Dollar Unclear About the Ups and Downs of a US Government Shutdown

The Japanese Yen outperformed to start the trading week as risk aversion struck financial markets, sending Asian stock exchanges lower and driving demand for the safe-haven currency. The MSCI Asia Pacific regional benchmark equity index plunged over 1 percent, with political jitters in the US and Italy unnerving investors. European and US stock index futures are trading sharply lower, arguing for continued blood-letting through the rest of the day.

In the US, worries about a looming government shutdown are reaching fever pitch after the Republican-controlled House of Representatives passed a measure that linked funding through mid-December to a delay on implementing the Affordable Care Act, commonly referred to as “Obamacare”. That trade-off is likely to be rejected in the Democrat-controlled Senate, meaning that passing a budget by the October 1 deadline looks unlikely.

Presumably, the markets view a possible shutdown in terms of its negative implications for market stability and the negative global growth implications of sudden fiscal retrenchment in the world’s largest economy. What this means for the US Dollar US Dollar is unclear however. On one hand, similar instances in the past (most notably, when Standard and Poor’s stripped the US’ AAA credit rating in 2011) saw the greenback rally on haven demand. On the other, the negative implications of a shutdown on US growth may mean the Fed will maintain QE as-is longer than expected, a negative driver for the reserve currency.

Meanwhile in Italy, embattled former Prime Minister Silvio Berlusconi attempted to shatter the ruling coalition over the weekend when he ordered cabinet ministers belonging to his PdL party to resign. That would create a power vacuum in the largest of those Eurozone countries that have been at the front line of the region’s debt crisis of recent years, with potentially dire consequences. Indeed, the Euro yielded the worst performance among the G10 FX majors in Asia.

More of the same appears likely ahead. The Germany-Italy 10-year bond yield spread has jumped to a two-month high, hinting the single currency remains vulnerable amid swelling funding stress. On the data front, the flash estimate of September’s Eurozone CPI reading is expected to put the headline year-on-year inflation rate at 1.2 percent, the lowest in five months. That may drive expectations of a dovish turn at this week’s ECB meeting, compounding Euro selling pressure.

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Asia Session:

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

Building Permits (MoM) (AUG)

1.4%

2.5%

-3.4%

23:01

GBP

Hometrack Housing Survey (MoM) (SEP)

0.5%

-

0.4%

23:01

GBP

Hometrack Housing Survey (YoY) (SEP)

2.4%

-

1.8%

23:15

JPY

Markit/JMMA Manufacturing PMI (SEP)

52.5

-

52.2

23:50

JPY

Industrial Production (MoM) (AUG P)

-0.7%

-0.3%

3.4%

23:50

JPY

Industrial Production (YoY) (AUG P)

-0.2%

0.5%

1.8%

23:50

JPY

Retail Trade (YoY) (AUG)

1.1%

1.0%

-0.3%

23:50

JPY

Retail Trade s.a. (MoM) (AUG)

0.9%

1.0%

-1.7%

23:50

JPY

Large Retailers' Sales (AUG)

-0.1%

1.2%

-1.6%

0:00

NZD

ANZ Business Confidence (SEP)

54.1

-

48.1

0:00

NZD

ANZ Activity Outlook (SEP)

45.3

-

43.3

0:05

CNY

Leading Index (AUG)

99.86

-

99.89

0:30

AUD

TD Securities Inflation (MoM) (SEP)

0.2%

-

0.1%

0:30

AUD

TD Securities Inflation (YoY) (SEP)

2.1%

-

2.1%

1:30

AUD

Private Sector Credit (MoM) (AUG)

0.3%

0.4%

0.4%

1:30

AUD

Private Sector Credit (YoY) (AUG)

3.4%

3.5%

3.2%

1:45

CNY

HSBC/Markit Manufacturing PMI (SEP)

50.2

51.2

50.1

2:00

NZD

Money Supply M3 (YoY) (AUG)

6.5%

-

5.2%

4:00

JPY

Vehicle Production (YoY) (AUG)

-7.6%

-

-1.5%

5:00

JPY

Housing Starts (YoY) (AUG)

8.8%

12.80%

12.4%

5:00

JPY

Annualized Housing Starts (AUG)

0.960M

0.994M

0.979M

5:00

JPY

Construction Orders (YoY) (AUG)

21.4%

-

13.7%

Euro Session:

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

6:00

EUR

German Retail Sales (MoM) (AUG)

0.5% (A)

-0.2%

Low

6:00

EUR

German Retail Sales (YoY) (AUG)

0.3% (A)

2.9%

Low

8:30

GBP

Net Consumer Credit (AUG)

0.6B

0.6B

Low

8:30

GBP

Net Lending Sec. on Dwellings (AUG)

1.0B

0.7B

Low

8:30

GBP

M4 Money Supply (MoM) (AUG)

0.7%

0.6%

Low

8:30

GBP

M4 Money Supply (YoY) (AUG)

-

1.8%

Low

8:30

GBP

M4 Ex IOFCs 3M Annualised (AUG)

-

3.3%

Low

8:30

GBP

Mortgage Approvals (AUG)

61.5K

60.6K

Medium

9:00

EUR

Euro-Zone CPI Estimate (YoY) (SEP)

1.2%

1.3%

High

9:00

EUR

Euro-Zone CPI - Core (YoY) (SEP A)

1.1%

1.1%

Medium

Critical Levels:

CCY

SUPP 3

SUPP 2

SUPP 1

Pivot Point

RES 1

RES 2

RES 3

EURUSD

1.3338

1.3429

1.3476

1.3520

1.3567

1.3611

1.3702

GBPUSD

1.5871

1.5988

1.6064

1.6105

1.6181

1.6222

1.6339

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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30 September 2013 07:05 GMT