Nov. 14, 2006 — The yen is higher across the board after Japan ’s third quarter gross domestic product (GDP) overshot consensus forecasts with a 0.5% quarter-over-quarter rise, maintaining expectations for a Bank of Japan (BoJ) rate hike before year-end. The fact that the yen has mainly fallen because of interventionist rhetoric from Japanese politicians, while mostly strengthening on raw data is a clear vote of fundamental confidence for the currency. Mixed growth data from the Euro zone have kept the euro under pressure against the dollar, while softer than expected U.K. consumer price index (CPI) is weighing on sterling.
The morning’s key U.S. data releases are both due at 8:30 am, with the October retail sales expected down 0.4%, matching the September decline and the core rate excluding auto sales seen down 0.2% after a 0.5% decline in September. We remind you that the dollar had rallied aggressively in the last retail sales report despite the 0.4% and 0.5% declines in headline and core figures. The main reason to that was the 0.8% increase in the ex-autos and gasoline figure (not the ex auto), which comforted markets that sales remained well buoyed when excluding falling gasoline prices and autos. The producer price index (PPI) report is expected to have fallen 0.5% in October, while the core rate is seen up 0.1%, well below the 0.6% increase in September. Such a softening in core PPI could weigh on the U.S. dollar on expectations that Wednesday’s CPI will may finally register a figure lower than 0.2%.
A raft of speeches from Federal Reserve officials should also get the market’s attention, the most important being St. Louis Fed President Poole’s speech on monetary policy at 12:00 pm. Poole’s speeches have grown increasingly dovish over the past six weeks, compared with the likes of Chicago Fed’s Moscow and Dallas Fed’s Fisher, who have remained mainly hawkish. Boston Fed’s Minehan and San Francisco Fed’s Yellen will speak at 12:00 pm and 3:45 pm.
Markets should also pay attention to any remarks on yen weakness from the heads of U.S. automakers as they meet with President Bush today. Treasury undersecretary Adams had been vocal earlier this year about the role of yen’s weakness in benefiting Japanese carmakers, but has since tempered his rhetoric since the appointment of Treasury Secretary Paulson.
Yen boosted by strong GDP The yen surged in early Asian trade after the Japan’s third quarter GDP grew 0.5% from second quarter, and 2.0% from the same quarter last year, following a rise of 0.4% q/q and 1.5% annualized in Q2. The report beat consensus forecasts of a 0.4% q/q and 1.1% increase. Some forecasters were even expecting a contraction in the q/q figure. It was the seventh consecutive reading of quarterly growth. Despite a slowdown in personal consumption, exports more than doubled, rising 2.7%, while capital expenditure rose 2.9%.
But the yen did fall off its 117.39 highs as traders await today’s US data and this week’s appearance by BoJ governor Fukui for his thoughts on the strong GDP report and his reactive insights to remarks from Ministry of Finance opposing a near-term rate hike.
USD/JPY faces considerable pressure at 118, followed by key resistance at 118.20, which is the 50% retracement of the 119.86-119.54 decline. A downside surprise in GDP (such as 0.1% in q/q) could extend dollar gains to as high as 118.60, but renewed interest rate speculation remains as the principal barrier for the pair. Support stands at 117.50, followed by 117.15-20. Key foundation remains at the 100-day MA of 116.80.
Euro retreats in mixed growth Clear evidence of a cooling in the Euro zone economy is pressuring the euro against the dollar around the 1.2830s. Provisional reports showed Euro zone GDP growth had slowed to 0.5% q/q and 2.6% y/y in Q3, less than forecasts of a 0.7% and 2.8% increase. Italy’s third quarter GDP rose 0.3% q/q from 0.6% in Q2 but beat expectations of a 0.2% rise. The data follows last week’s figures showing zero growth in France and a 0.6% increase in Germany.
Meanwhile, Germany’s ZEW economic expectations index dropped to a new 13 ½ -year low when it fell 1.1 points to - 28.5 in November, undershooting expectations of an increase to -25.0.
The data are not expected to stop the European Central Bank from its tightening course next month when it is seen raising rates by 25 bps to 3.50%. Today’s euro developments should be largely guided by US data. The expected decline in US retail sales would be especially dollar negative in the event of a softening in the core figure (excluding autos and gasoline).
EUR/USD sees initial support at 1.2815 support—38% retracement of the 1.2681-1.2899 rise, followed by emerging buying at 1.2790. Key foundation stands at 1.2760. Resistance starts at trend line resistance at 1.2840, followed by 1.2870.
Pound hit by softer CPI Sterling weakens across the board after U.K. CPI registered another 2.4% reading last month, undershooting forecasts of a 2.6% increase. The report further heighten the importance of Wednesday’s release of the Bank of England quarterly inflation report, which will shed light on the bank’s inflation vigilance. Following last week’s rate hike to 5.00%, the BoE remain open for further tightening in Q1.
Sterling nears the important support level of 1.8947, which is backed by 1.8926—the 50% retracement of the 1.8686-1.9176 rise. Initial resistance stands at 1.8995, followed by 1.9030.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 faxa.laidi@cmcmarkets.com
