FOREX: Yen Outperforms as Traders Look Past US GDP to EU Summit

Talking Points

• Traders Likely to Look Past US GDP Data, Focus on EU Leaders’ Summit
• Japanese Yen Topping Dollar as Safe Haven as US Inflation Outlook Firms
• US, European Stock Index Futures Point to Risk Aversion into Week-End

The Japanese Yen outperformed in overnight trade as risk aversion crept back into currency markets, with the likely source of anxiety being the EU leaders’ summit coming up on Monday. While the next major bit of fundamental event risk is the fourth-quarter US Gross Domestic Product report, its overall implications for price action appear limited beyond the very short term.

Indeed, the willingness of the Federal Reserve to lurch further to the dovish side of the spectrum even after six consecutive months of steady improvement in US economic data suggests a pickup in growth – with output expected to expand at an annualized 3 percent to mark the best performance since the second quarter of 2010 – is unlikely to mean much in terms of shaping the policy outlook.

Improving growth is broadly supportive for risk appetite in that an accelerating US recovery helps offset downturns expected this year in Europe and Asia, but most of that story has likely been priced into exchange rates already. With that in mind, it is the EU summit rather than the GDP report that stands as the next major inflection point for global financial markets.

On that front, traders cannot be faulted for a jittery disposition. A failure to sort out the details of the now almost-mythical “fiscal compact” meant to institutionalize budget discipline in the Euro area or secure agreement on private-sector involvement (PSI) in the second Greek bailout – where the government and banks have locked horns over the coupon rate on new longer-dated bonds to be swapped in for outstanding ones – threatens to unleash panic amid fears of a disorderly sovereign default that unleashes another global meltdown along the lines what happened in 2008.

European and US stock index futures are broadly lower in late Asian hours, hinting the sour mood is likely to carry on through into the week-end. Interestingly, traders seem to have substituted the Yen for the US Dollar as their go-to safe haven for the time being, which likely reflects suspicions that the Fed’s dovish leanings against a backdrop of firming growth point to a pickup in inflation, working against the greenback’s appeal as a refuge on store-of-value grounds. Indeed, priced-in expectations point to continued deflation in Japan while bets on US price growth have jumped considerably in the wake of the FOMC outcome.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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

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