As we were expecting, thin trading in the FX markets has left the majors within tight ranges, though Cable has started to test support at 1.9800 more aggressively while Euro has crept higher towards 1.4400. Nevertheless, the moves are minor and we are unlikely to see the volatility we saw around Thanksgiving.
â€¢ Yen: Strong Asian equities support carry trades
â€¢ Pound: Economic data may weigh on Cable later in the week
â€¢ Euro: Still testing 1.4400
â€¢ US Dollar: Holiday trading leaves greenback listless, Durable Goods on Wednesday
As we were expecting, thin trading in the FX markets has left the majors within tight ranges, though Cable has started to test support at 1.9800 more aggressively while Euro has crept higher towards 1.4400. Nevertheless, the moves are minor and we are unlikely to see the volatility we saw around Thanksgiving with Japanese markets closed today for the Emperorâ€™s Birthday, Europe and North America closed on Tuesday for Christmas, and a many countries closed down on Wednesday for Boxing Day.
Overnight, the open Asian stock markets including Chinaâ€™s Shanghai Index and Hong Kongâ€™s Hang Seng Index both gained following Fridayâ€™s gains on Wall Street, which helped support carry trades like GBPJPY and USDJPY. However, like the rest of the majors, price action in the pairs was insignificant. The Japanese yen could see a bit of volatility, though, when Tokyo re-enters the market tomorrow amidst signs that business sentiment in Japan faltered in Q4 as a stronger yen hurts exporters and a global credit crunch increases borrowing costs and damages prospects for growth worldwide. In fact, the BOJâ€™s Tankan index of manufacturer sentiment fell more than expected in Q4 to 19 from 23, and over the past two years, large shifts in the Tankan reading tend to coincide with movements in the BSI. The performance of businesses in Japan is of great concern to the BOJ, as the bankâ€™s governor, Toshihiko Fukui, said last week that he was concerned falling profits would hamper wage growth and put a dent consumer spending. Nevertheless, neither of these factors have shown sharp improvements in recent months, so if anything, the greater concern for Fukui may be that he will be prevented from pursuing further rate normalization before he leaves his post at the central bank early next year.
Indeed, the most recent policy meeting resulted in a unanimous vote to leave rates steady, as even the sole hawk on the monetary policy board, Atsushi Mizuno, backed off in light of the tumultuous credit market conditions and its threat to the economies of the US, UK, and Europe. Furthermore, with the BOJ having downgraded its assessments of the economy for the first time in three years last week and with inflation showing few signs of building, the markets are actually starting to consider the potential for a rate cut before Fukuiâ€™s departure. As a result, a disappointing BSI release may only lead this speculation to be exacerbated amongst traders and push USDJPY towards 115.
Visit our recently updated Japanese Yen Currency Room for specific resources geared towards this currency.
The DailyFX Research Team will be away from the office on Tuesday
and Wednesday, but you can still discuss the FX markets with other
traders in the DailyFX Forum. We sincerely wish you a happy and safe holiday season!
Written by Terri Belkas, Currency Analyst for DailyFX.com