Yen Falls Back

The main feature in the foreign exchange market is the slide in the Japanese yen.  For the first time this week, Japanese banks were sellers of the yen, perhaps encouraged by official comments and a larger than expected trade deficit.  Others may have been emboldened by the Japanese selling and the yen continued to sell-off through the European morning.  The dollar is back within spitting distance of JPY90 and the euro is approaching JPY120.  

Against the dollar, the euro and sterling have been confined to yesterday's ranges.  The only thing of note in terms of the price action is that each day this week, sterling has successfully tested the $1.58 area.  It has yet to close below the Nov 15 low, which marks the neckline of a potential double top.  On a risk-reward basis, sterling exposure is interesting.  

On the other hand the, dollar-bloc continues to under-perform.  The Australian dollar has again been turned back from the $1.0580-$1.0600 area and is flirting with the lows of the week just below $1.05.  A strong Chinese PMI was insufficient to avoid what appears to be stale longs exiting on rallies.  HSBC's measure of China's PMI rose to a 2--year high of 51.9 from 51.5 in December.  Gains were widespread, including output, orders, and employment, which account for about three-quarters of the index.  Exports also edged back above the 50 boom/bust line. 

The US dollar is trading near parity against the Canadian dollar for the for time in two months following soft Canadian data, and more importantly, a more dovish than expected Bank of Canada statement yesterday.  Essentially, the Bank pushed out from end of this year to second half of 2014 before conditions may warrant higher interest rates.  It will take longer than it previously thought for the economy to reach full capacity and for inflation to be back near target.  The Bank also acknowledged what it sees as the start of "constructive evolution" of the household sector.  The CAD1.0040-60 represents the immediate target.  

The euro is uninspired.  One can see what one wants to in the flash PMI.  Germany did show improvement.  Although the manufacturing component did rise to an 11-month high, at 48.8 (from 46) is still not showing what can be fairly considered strength.  The service component rose to an impressive 55.3 from 52 and is a 19-month high.   The German economy is expected to have contracted by 0.5% in Q4 12.  A small expansion is expected to be posted here in Q1.  

French data was significantly poorer and this continues an important theme as well.  Both manufacturing and services PMIs deteriorated further from the soft Dec reports.  The manufacturing PMI fell to 42.9 from 44.6.  The services PMI fell to 43.6 from 45.2.  The market had expected small improvement in both readings.  The divergence between the economic performances has yet to re-emerge as a market force, but does seem to exacerbate the divergence in national interest.  

Turning to Japan, when Abe et.al, first began talking the yen down they were talking about JPY85-JPY90.  Now there is more talk that JPY100 may be ok, but not JPY110.  At the same time, the Japanese delegation is also trying to deflect criticism in Davos.  Of all the things that move the foreign exchange market, wishes are not very high on the list.  News of the seventh consecutive drop in Japanese exports  and a worse than expected trade deficit provides fundamental fodder for the yen bears.  At JPY641.5 bln, the deficit was 20% larger than expected.  Imports rose 1.9%, a bit more than expected after Nov's 0.8% increase.    Given the importance of the leadership of Japanese participants currently, the North American market is unlikely to push the dollar above JPY90 today.