The
dismal trade data out of Japan has weighed heavily on the JPY today,
which is the worst performer in the G10. Exports fell 10.3%, the market
had expected a fall of 9.9%, which pushed the seasonally adjusted trade
balance to JPY 980.3bn in September, from JPY461.9bn in August. This is
the worst adjusted trade report since the 1990’s. This has fuelled a
broad-based yen sell off this morning and USDJPY has surged through the
200-day sma at 79.40. It is now on track to test key resistance at
80.10.
China disrupts Japanese growth
Since exports and trade are such an important part of Japan’s economy
the dismal September data could weigh heavily on growth in Q3 and into
Q4. This has increased speculation that the BOJ may intervene in the
market in a big way to try and weaken the currency and help boost the
competitiveness of Japanese exports. The last time the central bank
embarked on aggressive QE in February this year USDJPY rose from 76.00
to 84.00 in approx. 4 weeks. But the BOJ may be less willing to expand
its balance sheet to try and boost growth this time round. The reason is
that the bitter island dispute between China and Japan that kicked off
last month is one of the main reasons for the sharp decline in Japan’s
exports as Japanese factories in China had to close and consumers
boycotted Japanese products as the tensions rose. The political dispute
with China and the on-going Eurozone sovereign debt crisis is a toxic
mix for the Japanese export market as these two economies are Japan’s
largest trading partners.
The problem for the BOJ is that its action will only have a very
limited effect on making foreigners buy Japanese products. The BOJ can’t
heal the rift with China and make people in Beijing or Shanghai buy
Toyota cars or Uniqlo clothing (two of the companies’ impact by the
strife). Likewise, it is up to the powers that be in Brussels to sort
out the Eurozone sovereign debt crisis, and in an era of deleveraging a
weaker yen may not be enough to boost sales of Japanese exports to the
currency bloc. Thus, unless we see a serious adjustment in policy in
Japan then we may not see USDJPY regain those 84.00 highs from earlier
this year. This pair is already looking overbought in the near term so
we could experience some stickiness around the pivotal 80.00 level.
Support lies at 79.40 then at 76.80 – the top of the daily Ichimoku
cloud. See chart below.
A silver lining for Rajoy
There has been a dearth of economic data out of Europe and the US
today so it has been left to Spanish regional elections and also
Australian RBA rhetoric to fill the gaps. Spain seems no closer to a
bailout after regional elections on Sunday. PM Rajoy won his home state
of Galicia, while the nationalists did well in the Basque country and
they are likely to continue their roll during elections in Catalonia
next month. While the surge in nationalism could make it harder for
Rajoy to sign up for a line of credit or a bailout if it required more
austerity, there was a silver lining. Although the voters in the Basque
region don’t like Rajoy much, the dislike the Socialist opposition even
more, which helps to solidify Rajoy’s position in central government.
Since these elections were poised to be a confidence vote in Rajoy’s
government, things could have been a lot worse.
Why the OMT needs to be activated
This is the seventh consecutive week without the activation of the
OMT but this doesn’t seem to bother investors. Although Spanish bond
yields are slightly higher today at 5.42%, they remain well below the 7%
line in the sand. The question people are now asking is does the ECB
need to activate the OMT programme? It seems unlikely Spain will make an
aid request before elections in Catalonia in 4 weeks’ time, but this
doesn’t seem to be panicking the market, so there could be another few
weeks’ of respite. However, we agree with a leading Spanish think tank
that said today Rajoy should apply for a line of credit sooner rather
than later due to the heightened risks of Madrid missing its fiscal
targets for 2012 and 2013, which could spook investors and cause
disruption in the bond markets.
US problems eclipse the currency bloc
For now the Eurozone crisis could slip down the scale of importance
as we lead up to the US Presidential election on 6th November. The final
Presidential debate takes place tonight and the polls put Obama and
Romney neck and neck. This heightens the uncertainty about the outcome
and increases the prospect of the US falling off the cliff edge at the
start of 2013 if political deadlock ensues post the election next month.
While volatility remains fairly subdued, the fiscal cliff and problems
in the US could spark the next bout of volatility. Interestingly,
although volatility remains low assets like the S&P 500, oil, gold
and even some FX crosses have run into stiff resistance in recent weeks,
which could suggest a weakening of bullish sentiment. I will be
watching the gold price closely in the coming days and weeks. It rallied
during the summer on the back of central bank action that has kept
volatility levels depressed. However, if central banks’ actions remain
mute (ECB) or ineffective (Federal Reserve) then we could see gold longs
start to be unwound. $1,680 then $1,650 should act as solid support
levels. But a sell off in gold could lead to a broader market sell off,
so it is worth watching the yellow metal.
The end of the mining bonanza hurts AUD
In Australia, some dovish RBA rhetoric combined with fears that tough
budget deficit targets for this year may not be met caused AUDUSD to
sell off. However, it found support around 1.0320 – a cluster of daily
smas. In the next couple of days the direction of this pair will be
determined by the FOMC meeting that concludes on Wednesday.
Chart 1: USDJPY hourly chart – 80.00 could be a sticky level in the near-term, as this cross looks overbought.
