London Session: USDJPY and GBPUSD in focus

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By Kathleen Brooks | November 22, 2012 1:42 AM EST

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The big mover today has been USDJPY. It has reached its highest level since early April and has extended gains during the London session. 82.40 is the short term resistance level to watch, but the break above 82.00 opens the way to the 84.20 highs from mid-March. The driver of the move higher in this cross was weak Japanese fundamentals and some safe haven flows into the dollar after Bernanke's speech last night.

Japan gets off to a bad start for Q4

Japan saw exports drop 6.5% in October, which weighed on the trade balance. Although it narrowed slightly relative to September, at Yen 549BN, this is bad news for an export dominated economy like Japan's. It also suggests that the economy got off to a bad start in Q4 and could be on course to move back into recession at the end of this year. Added to this, the leader of the opposition Liberal Democratic Party, who is expected to become prime minister after next month's Lower House election, made further comments late yesterday that puts into question the independence of the BOJ under a LDP government. He also said he would raise the inflation target to 2%; Japan is currently in deflation, so if this target is to be met it will require a large amount of monetary stimulus and a sharp weakening of the yen.

Bernanke hands the Baton to Capitol Hill

The dollar managed to hold onto gains after Bernanke's speech failed to signal more accommodative policy moves at the December FOMC meeting. Instead Bernanke reiterated that it is too early to assess the effects of QE3 and also why the FOMC decided to pledge to keep rates low to 2015. He didn't reference the end of Operation Twist (which expires at the end of this year) and instead we will have to wait for the FOMC meeting on December 12th to find out how the Fed plans to replace this without tightening monetary policy. Bernanke sounded very concerned about the fiscal cliff, saying that it is basically in the hands of the politicians and if the US goes over the cliff edge there is not much that the Fed could do to cushion the economic blow. We have said before that policy stasis in the face of the fiscal cliff edge could drive safe have funds into the dollar.

A blow for Osborne

The UK was also in focus as MPC minutes and public sector finance data was released earlier. This data was somewhat contradictory from a market-movement potential. The public finance data was weak - the budget deficit widened in October as public sector spending rose. The shortfall for October was GBP8.6bn vs. expectation of a GBP6 bn deficit. Spending jumped by 7.8%, while tax receipts rose by a more modest 1.8%. This is worrying as October is usually a strong month for corporate tax receipts. This data suggests that the Chancellor may have to admit defeat over his borrowing target of GBP120bn for the fiscal year 2012/13 in his Autumn statement released on 5th December. This is pound negative as it threatens the UK's credit rating and also jeopardises the government's credibility as Osborne and Cameron have based their term in office to bring borrowing down to more sustainable levels.

Balancing this pound negative news was the MPC minutes from the meeting earlier this month. The committee voted 9-0 to keep interest rates on hold, while 1 member voted for more QE. There are a growing number of QE-sceptics at the MPC. Although we know Governor King is not in that camp, the chances of more QE at the February meeting have declined slightly after the release of these minutes. The committee was also concerned by the rise in inflation last month, which jumped back to 2.7%. The minutes stated that the committee now sees inflation remaining above the 2% target for longer.

GBP: out of drivers for now

These data releases have caused some volatility in the pound. It initially rallied back to 1.5925 before selling off back to 1.5910. We expect this cross to remain in a fairly tight range in the immediate term as markets thin due to the Thanksgiving holiday in the US. We don't see any near-term drivers for the pound until the BOE meeting early next month and the raft of economic data due in the first week of December. Thus we may be range-bound between 1.5855- the 200-day sma and 1.5955 in the next couple of days.

EURUSD: hanging on to the hope of an Ecofin relief rally

In Europe, finance ministers kicked the can down the road yet again when it came to Greece and did not agree to distribute its next tranche of bailout funds. A new meeting is scheduled for Monday 26th November. The clock is ticking and Greece needs immediate funds to service another bond redemption payment on 14th December. The sticking point seems to be an agreement on how to bring down Greece's debt to GDP ratio to 120% of GDP by 2020 with the IMF, but if the Eurozone continues to focus on the long term then it puts Greece at risk of default in the short term.

EURUSD brushed off the disappointment from Brussels and is back above 1.28. As we have said the bears aren't willing to take control and the bulls aren't giving up hope of a relief rally on the back of Greek debt deal, they will now need to have to wait for Monday's outcome.

European stocks are marginally higher; however it's hard to gauge direction in holiday-thinned markets. Initial jobless claims could cause a flurry of excitement later as they are released a day early. The market will be looking to see if there is any further impact on claims from Sandy, and also how quickly jobless claims data can bounce back after seeing a 78k rise in claims last week due to the storm.

Ones to Watch:


It's got to be USDJPY today:


GBPUSD: range-bound after mixed economic data


Best Regards,

Kathleen Brooks| Research Director UK EMEA |

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e:| w:

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