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Japanese Yen Leads as Significant Event Risk Approaches - Watch Crude

Japanese Yen Leads as Significant Event Risk Approaches - Watch Crude

2012-06-13 14:09:00
Christopher Vecchio, CFA, Senior Strategist
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Fundamental Headlines

- Merkel’s Choice Pits European Fate against German Voter Interest – Bloomberg

- Rajoy Battles ECB for Loans; Monti Appeals for EU Action – Bloomberg

- When Romney wasn’t so tough on China – Reuters

- Dimon to Fault Controls on Risk – WSJ

- Pressure Mounts for Italy’s Monti – WSJ

Asian/European Session Summary

High beta currencies and risk-correlated assets turned higher at the end of yesterday’s US session and the rally continued throughout the Asia session on Wednesday. Although broader markets fell slightly during early Asia, they rebounded with fervor in Europe and that’s been about it. There have been no big moves or outliers in FX, and as such, it’s a very muddled picture. While the New Zealand Dollar has been leading the rally the past two weeks, and continues to lead in the overnight, what has piqued my interest is that the Japanese Yen has steadied and emerged alongside the Kiwi as the top performer.

In part, the Yen’s strength today is due to the exceptionally poor data out of the United States that suggested the consumer base is weakening (long-argued in this column considering wage growth hasn’t kept pace with inflation) and that deflation may be setting in. Contracting Advance Retail Sales in May alongside signs of deflation in the Producer Price Index have put the QE3 trade in the near-term, if only momentarily, with the USDJPY falling alongside a rise in Gold. A deeper look at the data suggests that this is hardly the case, however, considering that the main reason for the decline in both reports is due to the decline in oil prices.

Contrary to popular belief, deflation in oil is a welcomed occurrence, as it drives down production costs for finished goods, thereby decreasing their cost as well. It is widely publicized that the Federal Reserve takes an anti-deflation stance, but what is more appropriate and what makes some deflation appropriate, especially in the core rate, is that wage growth over the last several months has not kept pace with inflation. If wage growth continues to trail, then disposable income will drop and that, ultimately, is the biggest threat to the US economy.

The US Dollar has faded slowly the past few days, but the Yen’s reemergence today bears mentioning (again) considering what’s ahead on the docket in the coming days. The Swiss National Bank meets tomorrow for their quarterly policy meeting; Euro-zone and US inflation data is due; the Bank of Japan meets Friday; and the second Greek election takes place Sunday. Given the expected outcomes of these events – no more easing considered in the near-term and disappointment in Greece – today’s price action by the Yen, and more importantly, Crude Oil (sitting at $82.40/brl at the time this report was written), says that risk-aversion is just around the corner.

Taking a look at credit, Italian and Spanish credit is deteriorating again, with their respective 10-year note yields rising to 6.215 percent and 6.715 percent. The stress is more apparent on the shorter-end of the curve, with the Italian 2-year note yield rising by 20.9-basis points to a 4.678 percent yield.

USDJPY 5-min Chart: June 13, 2012

Japanese_Yen_Leads_as_Significant_Event_Risk_Approaches_Watch_Crude_body_Picture_1.png, Japanese Yen Leads as Significant Event Risk Approaches - Watch Crude

Charts Created using Marketscope – Prepared by Christopher Vecchio

The Japanese Yen is the top performer, gaining 0.19 percent on the day against the US Dollar. Similarly, the New Zealand Dollar is up 0.18 percent as well. The Euro and the Swiss Franc are up meagerly against the US Dollar, gaining 0.17 percent and 0.19 percent, respectively. The British Pound is the worst performer, with the GBPUSD depreciating by 0.16 percent on Wednesday thus far.

24-Hour Price Action

Japanese_Yen_Leads_as_Significant_Event_Risk_Approaches_Watch_Crude_body_Picture_8.png, Japanese Yen Leads as Significant Event Risk Approaches - Watch CrudeJapanese_Yen_Leads_as_Significant_Event_Risk_Approaches_Watch_Crude_body_Picture_2.png, Japanese Yen Leads as Significant Event Risk Approaches - Watch Crude

Key Levels: 14:05 GMT

Japanese_Yen_Leads_as_Significant_Event_Risk_Approaches_Watch_Crude_body_Picture_5.png, Japanese Yen Leads as Significant Event Risk Approaches - Watch Crude

Thus far, on Wednesday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading lower, at 10172.30 at the time this report was written, after opening at 10181.47. The index has traded mostly lower, with the high at 10196.09 and the low at 10161.52.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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