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YEN BULLS ARE RUNNING SCARED

Today’s FX View from IB:

The dollar is undergoing somewhat of a reprieve midweek ahead of key labor market data this morning and later in the week in what could be further signs of thawing job market pressures. Intuitively these could signal further gains in risk appetite and more dollar losses. But today’s dollar strength is largely at the expense of the Japanese yen, where once again media speculation amongst reporters overly-obsessed by opinion about the yen continues to heighten speculation surrounding possible currency market intervention.

Japanese yen – Today it was the turn of reporting by the Nikkei journal, whose angle was that Prime Minister Hatoyama had suggested intervention was necessary to deal with a strong yen. He noted that such strength was problematic and couldn’t be left as is. Yet it took follow-up denial by a leading cabinet official as he denied Mr. Hatoyama had suggested official BoJ intervention.

Mr. Hirano also reiterated age-old comments from finance minster Fujii that what is undesirable is excessive currency volatility. The government doesn’t like sharp movements in the yen. While we know that the heightened yen isn’t doing exporters one jot of good, the decline in the dollar and therefore ascent in the yen have been reasonably orderly.

Weighing in on the debate was another BoJ committee member who gave the impression that intervention is an unlikely resolution. Noting that the Bank had yesterday stepped up its liquidity drive via direct lending, the official appeared to be spearheading the notion that its best response to unwarranted yen strength is via economic support rather than inconclusive attempts to take on foreign exchange markets. The dollar is higher at ¥87.17 as investors pull back their appetite for yen. The euro today also rose to buy ¥131.47.

U.S. dollar – The ADP private sector jobs report delivered news of a payroll loss of 160,000, which is possibly the smallest amount of job losses in about 15 months. On Friday the BLS delivers its official household survey and employment change in its non-farm payroll report. Once again the expectation of 120,000 job losses would be a huge improvement and the best reading since March 2008. Initial claims due on Thursday should show a third consecutive sub-500,000 reading of initial claimants.

All of this data together show signs of ongoing labor market improvement and could help improve risk appetite around the world. Sentiment towards the dollar should in that case deteriorate. But of course what to watch over the medium term will be the path of interest rate expectations. There is only so far the dollar can weaken on the Fed’s byline of “an extended period.” Once that wording comes under threat – whether it’s a fear of inflation rather than any actual hint of it – interest rate forwards will possibly act to support the dollar. Right now, this rather simple philosophy is premature, but suffice it to say the dollar’s downward trajectory is unlikely to be infinite. The further the U.S. economic fundamentals improve the happier everyone will be towards the Fed dropping its mantra. The timing of that is likely to occur sometime between the second and third quarters of 2010.

Indeed on Tuesday, Philadelphia Fed chairman Charles Plosser was out canvassing his perspective that a 3% growth rate between this and next year’s fourth quarter would be above the 2.75% trend. On that basis he suggests the Fed ought raise rates in line with market expectations because such above trend growth would cause investors to lock into borrowing costs for fears over inflation.

Euro – The dollar is in flux relative to the euro at $1.5088 although it has rebounded from overnight weakness at $1.5110. At Thursday’s regular ECB session we should learn the terms of the December 15 lending provision due to expire. The ECB seems unwilling to drop any hints about the prospects for raising interest rates in 2010 and has to deal with adverse impacts, which could include a rising currency if they give any appearance that rates may rise next year.

British pound – Two further PMI reports are due this week. The first delivered today showed a welcome thaw in the contraction of the construction sector. Its diffusion index reading improved to 47. A reading of 50 indicates standstill while above that point indicates expansion. The pound rose in response and even appears to have triggered a bull flag continuation pattern on the hourly chart. You could even argue that the target for the pound could be $1.68 from its current $1.6684. The pattern is evident on the Canadian dollar, which equally looks poised for upside on that view, while both euro and Swiss continue to trade in a confined range with the dollar. If the pound’s performance is a leading indicator here, we should expect a sudden bout of imminent dollar weakness today.

Aussie dollar – A rally in an index of base metals prices tracked by the London Metal Exchange helped convince investors that the prospects for the Australian dollar remain intact. While base doesn’t include gold, the yellow-metal surged to a new peak of $1,218.40 today. As it is one of the nation’s largest or at least most valuable exports, the Aussie was dragged higher by the bootstraps against the dollar and buys 92.81 U.S. cents. It was two weeks ago that the Aussie peaked for this season at 94.06. Despite prospects for a stand off from the RBA, the voracious performance of the economies of Asia and the Pacific are luring investors.

Canadian dollar – the loonie continues its advance against the dollar. At 95.72 this morning the Canadian dollar buys 2.75 more U.S. cents than at the climax of the Dubai crisis last week, which now continues to subside. Investors are driving the local dollar pretty close to significant resistance at 96 U.S. cents and a break above there would put the mid-October high at 98 cents firmly back on the radar. Such a movement will likely oil the chain at the bank of Canada who will likely warn over possible policy options in the event the Canadian dollar becomes expensive.

Source: IB

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