BOJ Shows Hand and Other Developments

The Bank of Japan intervened unilaterally in the foreign exchange market for the first time in three months and sent the dollar from JPY75.35, record lows, to JPY79.50 in two hours. Estimates put the size of the intervention at a new single day record near JPY6 trillion. The IMM Commitment of Traders showed the next speculative position had more than doubled in the most recent reporting period to 54.3k contracts from 26.9k contracts previously.

Although the intervention produced instant gratification for Japanese officials, the market began fading it quickly. Japanese officials quickly indicated they were not seeking to defend a certain level, like Swiss officials, giving this operation a sense of one-off, like prior attempts. That said, some of the tactics by the BOJ seemed particularly agreessive. Dollar support is seen near JPY77.50.

BOJ intervention had ripple effects across the other currencies as other positions were unwound. This fed into the weekend press that was somewhat more critical of the euro zone agreement than the market action would have suggested the latter part of last week. Italian and Spanish bonds remained under pressure. The French premium over Germany is rising.

European economic data was poor in the form of a larger than expectd rise in Italian Sept unemployment (8.3% vs expectations of 7.9% and Aug revised to 8% from 7.9%) and German Sept retail sales (0.4% rather than the consensus 1.0% increase).

Norway's central bnak indicated that it will buy NOK1.6 bln (~$290 mln) of foregin currencies a day in November for its oil fund. This is more than twice the amount the market had expected and nearly thre times the Oct pace (NOK550 mln). This coupled with poorer than expected retail sales report is leading to the under performance of the krone on a day when risk is broadly coming off. Retail sales, excluding autos and petrol, fell 0.5% in Sept comapred with the market consensus of a 0.2% increase. It is the second delcine in three months.

Retail sales were essentially flat in Q3. The central bank had kept rates stead earlier this month at 2.25% and pushed out the next hike into the seocnd half of next year. However, Norway's largest bank will hike the rate on its floating rate mortgages by 25 bp to compensate for rising funding costs. Tomorrow Norway reports Oct PMI and a modest decline from the 54.8 reading in Sept.

Technical readings warn that the euro is likely to recoup some ground in North America today. The $1.3950-75 area is likely to hold and a move back above $1.4050 will help stabilize the tone. Sterling looks to have bottomed near $1.5965 and resistance now near $1.6050. Meanwhile the greenback is likely to find support near CAD0.9920-40. Australian dollar's recovery from the test on $1.05 is likely to run out of steam ahead of the RBA's announcement early on Nov 1.