Carnage in Asia as short JPY positions squeezed aggressively
(Mount) Fujii erupts to give an early green light to USDJPY bears, but then backtracks slightly
MAJOR HEADLINES – PREVIOUS SESSION
- US Aug. Durable Goods Orders out at -2.4% vs. +0.4% expected and revised +4.8% prior
- US Sep. Final Univ. of Michigan Sentiment out at 73.5 vs. 70.5 expected and 70.2 prior
- US Aug. New Home Sales out at +0.7% m/m vs. +1.6% expected and revised +6.5% prior
- US Aug. New Home Sales out at 426k vs. 440k expected and 426k prior
- UK Sep. Hometrack Housing Survey out at +0.2% m/m, -5.6% y/y vs. +0.1%/-6.7% prior
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)- US Chicago Fed National Activity Index (1230)
- GE CPI (n/a)
- US Dallas Fed Manuf. Activity (1430)
- EU ECB’s Trichet to speak (1430)
- CA BOC’s Carney to speak (1940)
In the end it was a definite “risk off” day of Friday as weak US data in the form of durable goods and new home sales outweighed any positives to be gleaned from a final Michigan sentiment survey at its highest level since early 2008.
The off-loading of JPY short positions that had started in Asia eventually persisted and USDJPY slid below the much talked-about support level at 90.0. That said, the move was not overly eventful or aggressive once the level fell and the low was only 89.51. We had to wait until the Asian open this morning to see a more dramatic reaction (more below).
In weekend news, the final official G20 communique held nothing concrete for financial markets to get their teeth into. Granted there were some risk positives to be noted from aims to keep stimulus measures in place until a more confirmed economic rebound was in place, avoid a premature withdrawal yet prepare exit strategies and maintain a target of end-2012 for tightened bank capital ratios the be implemented. However, nothing fixed was put forward and so the positives were soon discounted in a market heavily slanted towards risk aversion.
This theme came back to haunt early traders in Asia, and with a vengeance, as this liquidity conditions saw exaggerated and speedy moves with the USD gaining the upper hand and JPY shorts squeezed until they bled. The EUR received a minor boost when it was announced that Germany’s Christian Democrats, headed by Angela Merkel, had secured enough votes to form a coalition government with preferred partners the Free Democrats. However, this was very short-lived and EURUSD managed only a 25 pip rally to 1.4720 from NY’s close on Friday.
Soon after it was the USD bulls in control, with further JPY short liquidation thumping USDJPY to an eight month low at 88.25. GBP extended its recent torrential slide to a four month low at 1.5772 against the USD and a six month low against the EUR, despite weekend press comments from the BOE that recent comments from Governor Mervyn King had been misinterpreted, and that there was no policy in place to deliberately advocate a weak pound. Selling pressure came predominantly from GBPJPY long liquidation, and was powerful enough to overcome any modicum of GBP positive news when the UK Hometrack house price index showed house prices rising for the second straight month in September.
The final nail in the coffin from JPY shorts came from headline quotes from Japanese finance minister Fujii. He reportedly said the recent USDJPY moves were “not abnormal” (following his comments on Friday that he was against deliberately weakening the JPY or any other currency). With USDJPY soon at 88.23, there was an element of backtracking from the new finance minister who came out and said he was now “watching the JPY” and “stable currency moves were desirable”. He also opined that currency moves were becoming “one-sided”. That was what forced the move back to the 89.30 level.
A more measured commentary on the state of the economy (and hence its impact on the AUD) came from RBA Governor Stevens in his testimony to a parliamentary committee. He said the downturn in the Australian economy was mild and that the fiscal and monetary stimulus measures put in place earlier in the year would be unwound as private demand picks up. He also added that the central bank would guide interest rates off their record low levels as global imbalances would begin to appear if rates were kept too low for too long. Australian interest rate futures were sold off a touch on this and the AUD was offered a tad more support.
As we head into a relatively quiet data session, the question still hangs as to whether the past two sessions have merely been a market correction of a deeper magnitude than we have seen recently, or is the beginning of a more longer-lasting risk-off consolidation phase. Certainly, some pairs have already reached some near-term objectives (GBPUSD near 1.5750, USDJPY near 88.0 and EURJPY to 130.0) and the sharp moves in Asia make it ripe for a squeeze in the other direction once Europe enters the fray. However, we think there is a greater risk that this USD (and more-so JPY) bid tone will extend with rebounds becoming shallower on each occasion. Note the Japanese half-year into Wednesday, and its related corporate repatriation flows taking advantage of Japan’s HIA initiatives, will likely stand in the way of a stronger USDJPY rebound. But were Fujii’s later comments the first signs of “verbal intervention”, or merely recovery after realizing the power of his words?
For the record, German CPI and activity indices from Chicago and Dallas Fed are the only economic data releases for today/ Speeches from ECB’s Trichet and BOC’s Carney may light up markets again. But we think a bit of caution is warranted.
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