Market Highlights:
· Overview: January 9, 2013
· Disappointing Data Won’t Stop the Aussie
· Abe vs. the BOJ
Overview: January 9, 2013
It was a negative day for equities and currencies yesterday, with the S&P down 0.32%, while the Euro crashed through the 1.31 level. There were rumors swirling in the market that France was going to be downgraded again, but these proved to be nothing more than talk, it also seems unlikely, since the last downgrades only happened in October.
The yen was active again, as banks reported large selling of USDJPY early in the New York session yesterday, as traders took profit on their positions. Although, that was quickly followed by a large buying flow, after Fitch reported that “they would consider a Japan downgrade without action on the debt.”
Cable has had a rough start to the year, after reaching 1.6255 on the very first day; it now finds itself sitting just above the 1.60 level. With the pair now through the 50- and 100-day moving average, traders will be eyeing up 1.59 where the 200-day moving average currently sits.
USDCAD is firmly stuck within the range that has defined the pair since mid-August, with 0.9825 and 0.9975 representing the breakout points. There’s not much conviction right now on either side, with momentum indicators offering no dispositions either.
Tomorrow, we have a European Central Bank rate meeting, as well as a Bank of England meeting, with neither expected to announce anything new. Overnight, the CNY trade balance will be released, which will give a look into the health of the world’s export machine, while Australia will look for a positive bounce in its building approvals after last month’s dismal -7.6% reading.
Disappointing Data Won’t Stop the Aussie
Aussie retail sales disappointed overnight, coming in at -0.1%, while economists were looking for a slight rise of 0.3%. This immediately knocked the currency back below 1.05, after sitting just below new monthly highs at 1.0530. However, it was the euro that provided the impetus this morning for the Aussie to make new highs, with persistent EURAUD selling causing a pop to 1.0540 in AUDUSD. The Aussie bulls refuse to back down, as the month of January has been characterized by persistent runs at 1.0530, which would validate a new bullish case for the currency pair.
The fundamentals for the Australian economy are nothing to write home about, especially since the price of iron ore sits at a level not seen since late 2009. But if the market continues to sell EUR and GBP, then the Aussie should naturally be supported on the cross. If you are a bull, then 1.0630 will be your next make-or-break line in the pair. A break of that could open the Aussie up to make new all-time highs.
Abe vs. the BOJ
Japan continues to grab headlines, as traders can’t seem to get enough of the pair, with most banks reporting daily flow at over 160% of normal. A headline out yesterday from Reuters said that Japan might even double its inflation target to 4%, which is a novel idea, but would probably never be taken seriously, as Japan has been in chronic deflation for the last decade. Everything seems to be pointing to continued weakness for the Yen, as it seems newly elected Prime Minister Abe’s new favorite sport is to keep calling for unlimited Bank of Japan (BOJ) easing.
The BOJ has been rather quiet during last few weeks, neither confirming nor denying any of Abe’s statements, as it is no doubt mulling its options. Traditionally, a central bank or banker would never consider the political will of the ruling party, as it is their job is to look at the economy through a lens not biased by a political platform. If the BOJ bends to the will of Prime Minister Abe, then the independence of the central bank will be viewed as compromised and markets could in turn punish Japan through massive selling of Japanese bonds.
The problem is that the BOJ will have to act in some sort of way, as the current situation is not providing the necessary framework for growth. So the situation will become one of perception—do nothing and show the market that the BOJ marches to its own tune, or do something and risk being seen as compromised by the market. Neither looks to be an attractive option.
USDJPY buyers are back in fashion today, with option volumes across 1-month, 3-month, and 6-month tenors continuing to make new highs. Everyone seems to be in the short yen trade right now, which would usually mean it’s time to exit, but it seems the currency still might have some more room to run, with many banks announcing price targets in the 90s. One thing that is certain is that as long as the political turmoil continues in Japan then the Yen should continue to experience heightened volatility.
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Currencies
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Today's Currency Rates
Currency Mid-Market
USDCAD 0.9862
CADUSD 1.0138
EURUSD 1.3038
USDJPY 87.74
AUDUSD 1.0525
NZDUSD 0.8402
USDCHF 0.9272
GBPUSD 1.6000
USDMXN 12.7625
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