Yen Rebounds, Dollar Soft

The US dollar is sporting a softer profile today.  It had initially extended its gains after recovering in North America yesterday. In Japanese candlestick terms the euro and sterling had recorded "shooting stars", in essence opening on their highs and finishing on their lows.  Additional profit-taking was seen in Asia, earlier today.  The euro was pushed below its 20-day moving average for the first time since Dec 11.  Sterling fared better but still extended yesterday's losses.  However, in the European morning, both currencies have recovered to move back into yesterday's ranges.

The price action can be attributed to thinning market conditions and the recovery of the yen.  Indeed, "sell the rumor buy the fact" gains in the yen, may have pressured the other currencies as cross positions were also unwound.   The dollar has stabilized after slipping through the JPY84.20 area to trade below the previous day's low for the first time since Dec 10. 

The BOJ did what had been generally expected.  It increased its version of QE for the third time in four months.  The JPY10 trillion increase, evenly divided between JGBs and T-bills, brings the program to JPY101 trillion, to be completed by the end of 2013.  The decision was unanimous.  There was a weak attempt to get rid of the current 10 bp paid on bank reserves (lost 8-1).  Although the newly elected government, which has yet to take office, took credit for the BOJ decision, it is a bit more complicated.  The BOJ did not adopt an open-ended stance.  Nor did it change its inflation target, though said it will review it in January.  Lastly, the BOJ cut its economic assessment.  

Sterling had drawn within ticks of the year's high yesterday (~$1.6309 set on Sept 21) but beat a hasty retreat.  However, despite poor Nov retail sales, is poised to challenge that area again.  The unchanged report compares with consensus expectations for a 0.3% increase.  The 0.9% year-over-year pace is the weakest sine April.  Anecdotal reports suggest the holiday shopping season is off to a soft start.  

The Australian dollar has under-performed in recent days.  It has been approaching the $1.06 level last week, but has for the fourth consecutive session recorded lower highs.  Nevertheless, buyers emerged in front of $1.0460 today and the Aussie appears poised to reclaim the $1.05 level.  Its recovery, like sterling, seems to be despite the news stream not because of it.  In particular, Australia's Treasurer Swan conceded that a it will not be able to deliver a budget surplus this year, as previously hoped, which was part of Prime Minister Gillard's re-election pitch.  The election will be held in late 2013.  

Italy is moving toward approval of the 2013 budget.  This will be the last action before it is dissolved to make way for what appears to be a late February election.  The dissolution of parliament is also seen as the precondition for Monti to declare his intentions.  Contacts in Rome suggest that Monti will likely lead a centrist coalition (UDC).  To be sure, the polls suggest Monti unlikely to win, but it may help ensure that a center-right coalition of the PDL and Northern League will not win, which means that a greater part of the technocrat government's reforms will not be dismantled.  

Although Monti's root are in the center-right, the stronger support for his agenda has come from the center-left.  The PD leader and former communist Bersani for obvious reasons did not want Monti to run, but has since reconciled himself to it and now sees that may actually increase his chances of being Prime Minister.  While there is still some talk that in a PD-led government Monti would be offered the opportunity to be the next President, the more recent discussions suggest Monti would be finance minister.  

Lastly, turning to Greece, comments by the finance minister yesterday warning the a Grexit is still possible next year, seemed to have cut short the huge rally (post the second restructuring) in Greek government bonds.  However, the comments seemed aimed at a domestic audience to underpin the resolve in the hard work that remains.  Meanwhile, poor bank earnings and reports that the IMF continues to balk over aid to Cyprus is taking a toll on the financial sector today.