US Dollar, Japanese Yen Fall on Rebound in Risk Appetite (Euro Open)

Key Overnight Developments

·         Japan's Trade Deficit Widens as Exports Plunge Most on Record

·         BOJ Keeps Interest Rates Unchanged at 0.10%, Cuts GDP Forecasts

·         Australian Consumers Bet Inflation Will Rise This Year

·         New Zealand Manufacturing Sentiment Improves in December

Critical Levels

The Euro rose against the US Dollar in overnight trading, reclaiming a hold on the 1.2950 level and testing as high as 1.3063. The British Pound also saw upside momentum, testing above 1.40 once again. 


Asia Session Highlights

Japan’s Trade Balance saw the deficit widen as exports plunged -35% in the year to December, the worst reading on record and the largest drop in at least 28 years. Exports to the US and Europe dropped by the most ever, down -36.9% and -41.8% respectively. Shipments to Asia fell -36.4% while those specifically to China dropped -35.5%, suggesting emerging markets are quickly catching up with the worldwide economic slowdown. Dwindling global demand has pushed companies to cut back production capacity and boosted unemployment, weighing on consumer spending and depressing overall economic growth. The central role of overseas buyers may prompt policymakers to take the more drastic step of intervention in the forex market to drive down the value of the Yen, making Japanese exports cheaper and thereby more attractive. A trade-weighted index of the Japanese Yen’s average value against the world’s top currencies rose 30.3% through 2008 as widespread flight from risky assets saw investors unwind carry trades funded by the perennial low-yielder.

The Bank of Japan validated expectations and voted unanimously to keep interest rates unchanged at 0.10%. The statement accompanying the release said officials think the economy is “likely to keep deteriorating for the time being” and that they will be moving forward this month with previously announced plans to buy commercial paper in an effort to secure credit access for domestic firms (initially, the BOJ committed to buying 3 trillion yen worth of commercial paper). Policymakers also noted that they will consider buying commercial bonds with maturities up to one year. Finally, the BOJ cut its forecasts for GDP growth from -0.6% to -2.0% in 2009 and from 1.7% to 1.5% in 2010.

Consumer Inflation Expectations data showed Australians think prices will grow 2.7% in the year from January, a reading marginally higher than the 2.5% recorded in the preceding month. Typically, rising inflation is associated with a quickening in the pace of economic activity. Indeed, 55.6% of survey respondents said they expected inflation to rise, up from 48.6% in December. Still, a poll of economists conducted by Bloomberg expects overall output will shrink -0.3% in 2009 while trading in overnight index swaps show traders pricing in another 75-100 basis point interest rate cut when the Reserve Bank of Australia announces policy in February.

New Zealand’s Business NZ Performance of Manufacturing Index revealed that industrial sentiment improved to 42.5 in December from 35.2 in the preceding month. Importantly, the reading is still below the boom/bust 50 threshold and continues to point to contraction in the manufacturing sector. New orders grew a healthy 7.1%, the most in at least 8 months, while overall production added 10.6%. At this stage, it remains to be seen if December’s data represents the beginning of a rebound or a one-off seasonal uptick liked to ramped-up production for the holiday season.


Euro Session: What to Expect

The economic calendar is largely uneventful in European trading hours, offering few new insights and therefore holding little market-moving potential. French Consumer Spending is expected to shrink -0.6% in the year to December as quickly deteriorating economic conditions prompt cautionary saving. Euro- Zone Industrial Orders are seen shrinking by a whopping -20% in the year to November on dwindling global demand. 

On balance, forex price action is likely to take its cues from cautiously improving risk appetite across financial markets. Asian stock exchanges followed Wall St higher, adding just over 1% on average, while US stock index futures also ticked higher by just shy of a percent. The rebound in risky assets weighed on safe-haven currencies as indices of the average value of the US Dollar and the Japanese Yen fell as low as -0.6% and -1.2%, respectively. The markets were reassured as US Treasury Secretary nominee Timothy Geithner said in his confirmation hearing that he and new US President Barack Obama will issue a “comprehensive plan” for dealing with current financial and economic turmoil within the next few weeks. If current trends continue traders are likely to see JPY and USD come under continued selling pressure, especially against higher-yielding currencies like the Australian and New Zealand Dollars.



To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.