A$ extends losses; JPY slides on “unlimited” easing prospects

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By Chris Gore | November 16, 2012 9:43 AM EST

GoMarkets

Euro-Zone enters technical recession; US fiscal blues persist

From fiscal cliff concerns, a trough in US data points, and constant noise from the Euro region, a slew of negative directives remained a hindrance for global markets overnight. The devastation of 'Super-storm' Sandy manifested in the latest jobless claims, with the number of US citizens applying for benefits for the week ending November 10 rising to 439,000. The market consensus was for a rise to 375,000 from 355,000 the week before. The closely watched Philadelphia Fed index slumped to -10.7 in November from a previous index level of +5.7 - also suggesting the effects of Sandy have taken its toll on manufacturing in the region. Economists had called for a fall to +2.

US consumer prices remained subdued in October, with the headline rate edging 0.1 percent higher to represent 2.2 percent growth in annual terms. Core prices which exclude the food and energy components rose 2.0 percent on year, unchanged from September and in-line with expectations.

US equities finished the sessions moderately lower with the DOW and S&P closing down 0.53 and 0.47 percent respectively.

Earlier, European equities also took a moderate hit with the Eurostoxx 50 index falling 0.45 percent; nevertheless the Euro was able to buck the trend remaining largely buoyant against major counterparts. The Euro-zone has entered a technical recession according to growth data released overnight. The economy contracted 0.1 percent in the third-quarter, from a second-quarter drop of 0.2 percent. In yearly terms the Euro-Zone contracted 0.6 percent. Still, earlier preliminary GDP estimates from the top two Euro region economies, Germany and France, ticked slightly higher than consensus estimates.

Yen slides on "unlimited" easing prospects

To the joy of Japanese manufacturers, the Yen plunged for the second consecutive session as markets looked to the probability of a new government unleashing unlimited monetary easing, in an effort to stoke inflation.

The political high-drama continued in Japan with Prime Minister Yoshihiko Noda likely to dissolve the lower house of parliament on today, in turn an election is expected to see Noda's ruling party ousted. Under Japanese law and election must take place within 40-days from the dissolution of parliament. It's expected the ruling Democratic Party of Japan will be voted out in place of the Liberal Democratic Party, led by Shinzo Abe. Should this occur, it will be the seventh change of leadership in seven years. A Change of leadership lead by the LDP's Shinzo Abe appears to be a Yen bull's worst nightmare, with Abe making clear he's ready to assassinate the Yen with "unlimited" quantitative easing.  "The BOJ must set a new inflation target and print unlimited yen to achieve it. That's something similar to what the Fed and the ECB are doing. Only then would BOJ steps have a big impact on markets." Abe stated in a news conference.

The Yen suffered a significant hit against its major counterparts with gains in excess of 1-percent against the dollar, euro and sterling. The USDJPY pair has slipped through two big figures in two day with pricing action rising to near 7-month highs of 81.47 overnight.

Aussie dollar extends losses on souring risk trends

With the exception of the Yen, the Aussie dollar took a sizeable hit against major counterparts overnight, led by a sharp drop against the Euro and Swiss franc. After largely evading steep losses across risk barometers last week, it appears the local unit is playing catch-up, leading the declines against its fell commodity bloc counterparts the Kiwi and CAD. The Aussie fell through pockets of support against the greenback, bottoming out at solid support just shy of 103-figure. Correlative behaviour with that of US equity markets appears to be a driving force in addition to residual weakness as a result of significant build-up in Yen sales, for which the greenback is a major beneficiary.

Meanwhile, data from the RBA continues to show the bank are leaning on the Aussie dollar by accumulating FX reserves, rather than translating exposure back to home soil in the open market. The RBA is held A$457 million in foreign currency reserves in October according to the latest data, after accumulating more than A$800 in reserves through August and September, compared with an average of just under $50m in the second quarter. In essence, rather than translating accumulated foreign reserves back to home currency, the RBA is sitting on reserves in a passive attempt to take some of the froth off the top. We anticipate this exercise to be limited in duration given the risk of accumulating a mountain of US dollar denominated reserves, which carry little to no yield and watered down to the tune of $40bn per month, courtesy of the Federal Reserve. Nevertheless, recent times have seen a step-up in rhetoric from board members in relation to persistent strength of the local unit, suggesting the high Australian dollar is more than ever on the banks radar.

With no scheduled releases on the local docket we anticipate support at 103 US cents to remain in play during the local trade. Regional equity performance will govern moves in the local session, although we see very little cause to expect a deeper trough in the 102-handle. The eyes of the world will of course remain on China in light of the once in a decade change of leadership with newly anointed leader Xi Jinping at the helm. Currencies such as the Australian dollar, attached to economies highly contingent on policy in the region will no doubt be particular susceptible to reforms and leadership style of the new governing council.

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