Yen resumes southbound trajectory
True to recent form, the bulk of the excitement came from the Japanese Yen overnight, which resumed a decline following comments from Japan's Vice Finance Minister Takehiko Nakao.
The focus is on Japan's breaking off the fire of a stimulus. Japanese 10,000 yen notes are spread out next to U.S. 100 dollar bills at an Interbank Inc. money exchange office in Tokyo, in this September 9, 2010 file photo picture illustration.
The government wasted little time in launching a counter strike following Tuesday's post-policy decision bounce, with Nakao warning Tokyo remains on high-alert and "will take appropriate action if necessary" if the currency slips back into old habits. These comments along encouraging Chinese data created an inflection point for further Yen losses, with the benchmark USDJPY pair rising beyond 89-figure and subsequently squeezing out the weaker short hands, before touching the Y90 levels.
It would appear the breach of stop-loss orders has exacerbated the upside for the pair, with similar moves noted across the board. The Euro which led the offensive against the Yen with price action back above the Y120 region, with the Aussie bringing up the rear with more moderate gains noted.
Takehiko Nakao's comments serve as a stark reminder of the Governments unrelenting drive to pursue a weaker currency in attempt to resuscitate the economy. Nonetheless, attempts by the Abe government to devalue the Yen are not without its critics, with German Bundesbank President Jens Weidmann weighing into the debate by warning of the "politicization of exchange rates," while flagging the risk of the Bank of Japan losing its autonomy.
While the Bank of Japan's efforts may be somewhat uninspiring given the new stimulus initiatives won't take effect until 2014, it's also worth considering the possibility of the BOJ's plans being tweaked after the current Governor Masaaki Shirakawa's term expires in April. We're expecting to see a pro-stimulus ally of the Abe government installed, suggesting the banks latest effort may be just a taste of things to come.
U.S stocks failed to launch overnight despite a series of positive data points and a degree of solace felt over the temporary suspension of the debt ceiling. Still, the S&P500 is at 5-year highs and at the time of writing looking to close the session slightly in the black. As well as corporate earnings, European leads and the debt ceiling, markets remain focused on the economic data pulse.
Weekly jobless claims fell for the second consecutive week with the number of U.S citizen applying for unemployment benefits dropping to 330,000 for the week ending January 20.
A private gauge of manufacturing compiled by Markit rose to 56.1 in January from previous index reading of 54. Economists expected a moderate decline to 53.
Leading indicators rose 0.5 percent in December last year, edging slightly higher than the 0.4 percent growth expected.
A$ hits the skids; Euro on a slow burn higher
Besides the Yen, the great under-performer overnight was the Australian dollar which led the commodity bloc lower against the greenback. The bounce noted in the domestic session following the Chinese PMI data proved to be unsustainable, with buying optimism making way for an extended period of selling, eventually breaking pockets of support down to lows of 104.5 US cents.
At first glance it would seem strange selling pressure has been prominent overnight given broader sentiment appears to be positive to neutral. Nonetheless, look a little deeper and we can see a sharp decline against the Euro, in turn prompting residual weakness across the board.
The EUR-AUD pair found its footing above AUD1.27 levels to near 1-month highs of highs of 1.2790.
Solid European data kept Euro buyers interested overnight following German manufacturing data. It's also clear the Euro's latest ascent is as much about the unwinding of 'break-up' trade which plagued the currency over 2012, as it is any fresh long-side positioning. The two of course work hand-in-hand, and while there will be questions over the health of the periphery long into the future, the risks are judged to be significantly less so than just a couple of months ago. Residual support from a strong EUR-JPY performance is also a prominent factor in overnight moves.
With little in the way of onshore directives, regional equities activity and data will remain a guiding factor, but we anticipated overnight lows of 104.5 to hold the downside at bay in the domestic session.
Japan will remain closely watched during the domestic session with consumer price data, Bank of Japan minutes and the small business confidence survey on the docket.
At the time of writing the Australian dollar is buying 104.65 US cents.