Yen Gains as Government Cuts Outlook, Euro Vulnerable on Crisis Fears

Talking Points

• Euro Vulnerable as EU/IMF Review Portugal Aid Program, Spain and Italy Sell Bonds
• Richmond Manufacturing Survey, US Consumer Confidence Data May Dent QE3 Hopes
• Japanese Yen Outperforms in Quiet Asia Trade as Government Cuts Economic Outlook

Currency markets were little changed in Asian hours, with most of the majors trading effectively flat against the US Dollar ahead of the European session. The Japanese Yen narrowly outperformed, adding as much as 0.5 percent on average against its top counterparts, as a drop in Asian stocks drove demand for the regional haven currency. The move followed the release of Japan’s monthly Cabinet Office Economic Report, where the government slashed its performance expectations citing a further slowdown inexport demand and sharp volatility in global financial markets.

A quiet economic calendar in European hours keeps the Eurozone debt crisis in focus. The spotlight is now on a formal review of Portugal’s EU/IMF bailout program. Traders will look for any sideline commentary exposing weak spots in Lisbon’s adherence to the terms of its rescue package amid concerns that other periphery economies may mirror the precarious situation in Greece. Such an outcome would undermine stabilization efforts painstakingly crafted over recent years and cast doubt on the EU’s ability to formulate a coherent crisis-fighting strategy going forward, weighing on the Euro.

A pair of bond auctions from Spain and Italy rounds out the docket, with traders watching average yields and bid-to-cover readings to gauge regional funding stress. Ten-year periphery Eurozone bond yields are on the rise against the benchmark German equivalent overnight, hinting at a pickup-up in sovereign risk jitters.

Later in the session, US economic data comes back into the forefront. Augusts’ Richmond Fed Manufacturing Activity gauge and Consumer Confidence reading are on tap, with narrow improvements expected on both fronts. This may turn the markets’ attention to the recent improvement in US economic data, denting hopes for a QE3 announcement at Friday’s much-anticipated speech from Ben Bernanke at the Jackson Hole central bank symposium and boosting the greenback

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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

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