FX Update: USDJPY at key inflection point once again

FX Update: USDJPY at key inflection point once again

The risk rally from yesterday carried through into today, though it has lost all momentum ahead of the US trading session. EURUSD had a go at the weekly pivot area just above 1.2450, but couldn't maintain altitude, especially after German officials were out discussing the desire to permanently ban the naked short-selling of certain EuroZone securities. That latter announcement saw the pair well back below yesterday's US session high of 1.2395. Other risk pairs saw new highs overnight, but were also pushed back lower in the early US hours. Bonds are also firm this morning, which is working against a continuation of yesterday's developments and pressuring the rally in JPY crosses. As for European bank stress levels and sovereign debt spreads, the situation appears marginally better this morning than yesterday's level.

Japanese Data
The data out of Japan overnight was particularly gruesome, with signs of deepening deflation and an ugly drop in household spending and a rise in the jobless rate. It is tough to see how Japan is going to dig itself out of its problems, which are aggravated by one of the world's scariest "population pyramids", or demographics that show an accelerating percentage of the population moving into retirement age, while the percentage of the population entering the workforce shrinks. One wonders if the government could eventually reach for radical measures to tackle the incredible debt burden and sluggishness of economic activity. Such ideas have been discussed already by lawmakers, though nothing is on the table.

While in the short term, the JPY crosses seem happy to follow the wiles of the major government bond markets, remember that the new Democratic government is far more likely to do something "out of the box" than the old-guard LDP. This is something to tuck into the back of our minds for the longer term, as Japan is the extreme example of a country facing an unbearable sovereign debt load. Japan's CDS prices are the highest for any G-10 currency (though, of course, the EuroZone periphery have much higher prices in many cases, though the core countries don't - an obvious reflection of the turmoil the EuroZone faces). At some point, to see a further indication that this situation is getting Japan into trouble, we should look for an acceleration in sovereign debt worries and/or signs that the long end of the bond curve is showing a lack of faith in long Japanese bonds. Any unwind could be incredibly rapid once a loss of confidence is felt in this market and the fallout unimaginable.

Chart: USDJPY
USDJPY is at a technical crossroads at the moment, having closed yesterday right at the 200-day moving average (at the same time the S&P500 in the US closed at the same moving average - you can't make this stuff up. Today the pair tried to follow through and has so far topped out at the bottom of the daily Ichimoku shadow - a key resistance point. Whether we see follow through higher or a reversal back into the lower range will likely hinge on activity in the US bond market and risk in general today. This is a critical are for the pair to decide whether a rally i is on or whether the risk is greater for an eventual test of the multi-year lows down below 85.00 .

Looking ahead
This is a confusing month-end fixing situation, as some of yesterday's rally in risk may have at least been partially driven by the obvious potential for fixing flows when equity and bond market moves have been so enormous over the past month. As well, while US and UK markets are closed on Monday, some end of month fixing may take place on Monday instead. Basically, we need to get to Tuesday next week before we can feel that these end-of-month considerations are fully behind us.

Next week offers quite the gauntlet of event risks that will tell us whether the market is moving out of general hope/fear mode and beginning to ponder the fundamentals. The RBA and BoC are both out with rate decision on Tuesday, with the former expected to pause (but market will be highly tuned to guidance) and the BoC expected to hike, though that expectation may yet be dashed if equity markets drop back toward their recent lows. In addition, we have the US ISM reports on Tuesday and Thursday and the Employment report on Friday, which also sees a Canada employment report

For the risk bulls to really make a statement here in the shortest term, we need to see a second strong day of rallying in risk to firmly establish they have the upper hand. Anything less than that would appear to mean that the bears are still in control here.

As ever, stay careful out there.

Economic Data Highlights

• New Zealand Apr. Building Permits rose 8.5% MoM
• UK May GfK Consumer Confidence Survey fell to -18 vs. -16 expected and -16 in Apr.
• Japan Apr. Overall Household Spending fell -0.7% YoY vs. +2.5% expected and 4.4% YoY in Mar.
• Japan Apr. Jobless Rate rose to 5.1% vs. 5.0% expected and 5.0% in Mar.
• Japan May Tokyo CPI ex Fresh Food & Energy out at -1.4% YoY vs. -1.3% expected and -1.4% in Apr.
• Japan Apr. National CPI out at -1.2% YoY vs. -1.1% expected and vs. -1.1% in Mar.
• Japan Apr. National CPI ex Fresh Food & Energy out at -1.6% YoY vs. -1.4% expected and -1.1% in Mar.
• Japan Apr. Retail Trade out at +0.5% MoM and +4.9% YoY vs. -1.0%/+3.8% expected, respectively
• Switzerland Apr. Trade Balance out at 2.02B vs. 1.69B in Mar.
• Norway May Unemployment Rate fell to 2.7% vs. 2.8% expected and 3.0% in Apr.
• Sweden Q1 GDP rose 1.4% QoQ and 3.0% YoY vs. 1.0%/1.5% expected, respectively
• Sweden Apr. Household Lending rose 9.2% YoY vs. 9.3% in Mar.
• Sweden Apr. Retail Sales fell -0.2% MoM and -1.2% YoY vs. +0.6%/+1.5% expected, respectively
• Switzerland May KOF Swiss Leading Indicator out at 2.16 vs. 2.02 expected and 2.05 in Apr.
• Canada Q1 Current Account out at -$7.8B vs. -$7.5B expected and -$10.2B in Q4
• US Apr. Personal Income rose +0.4% as expected
• US Apr. Personal Spending out at 0.0% MoM vs. +0.3% expected
• US Apr. PCE Core out at +0.1% MoM and +1.2% YoY vs. +0.1%/1.1% expected, respectively

Upcoming Economic Calendar Highlights

• US May Chicago Purchasing Manager Index (1345)
• US May Final University of Michigan Confidence (1355)
• US May NAPM Milwaukee (1400)
• UK May Hometrack Housing Survey (Sun 2301)
• Japan May Nomura/JMMA Manufacturing PMI (Sun 2315)
• Japan Apr. Industrial Production (Sun 2350)
• US Fed's Bernanke to Speak in Korea (Mon 0025)
• EuroZone ECB's Trichet to Speak in Korea (Mon 0025)
• Australia Apr. HIA New Home Sales (Mon 0100)
• US Fed's Evans to Speak in Korea (Mon 0110)
• Australia Q1 Current Account Balance (Mon 0130)
• Japan Apr. Labor Cash Earnings (Mon 0130)
• Australia May Rimark Australia Median House Price Index (Mon 0200)
• New Zealand May NBNZ Business Confidence (Mon 0300)
• Japan BoJ's Shirakawa to Speak (Mon 0320)
• Japan Apr. Housing Starts (Mon 0500)