Thursday October 28, 2004 - 11:06:44 GMT
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FOREX: US OPEN MARKET POINTS 10-28-04
Playing Chicken with BOJ
The most interesting price action in the overnight session occurred in USD/JPY where despite mixed Japanese economic data yen continued its relentless move to the 106 handle. Japanese Industrial Production which was expected to show a positive 0.4% rise on a month to month basis actually reported a –0.7% decline as chip manufacturers and electrical machinery makers curbed production in response to shrinking global demand. Large Retailer Sales printed –3.4% continuing a 7 month trend of lower year on year comparisons. The one positive report was the Retail Trade figure which showed a rise of 1.0% versus –0.1% expectation. While, the eco news was hardly banner for the yen, traders keyed off the positive price data from the oil market (Oil declined 2.5% on better than expected US inventories) as one reason to keep shorting the pair. Yet in reality, with oil remaining above $50/bbl for over 5 weeks, a small retrace in the price of the commodity would do little to stimulate world demand which is so necessary to the success of the export-driven Japanese economy.
In fact, absent strong fundamental news-flow, the rise in the yen was triggered by more technical factors. While yesterday we noted that Japanese officials expressed their concern about the decline of the dollar, many other analysts pointed out the fact that BOJ is unlikely to interfere during the final week of the US election. Sensing a temporary advantage, yen bulls pressed their trades trying to push USD/JPY below the 106 handle to trigger stops that would carry the pair well in to the 105 territory. However, as we go to print the pair has rallied 50 pips in a matter of 10 minutes, catching many momentum players in a nasty short squeeze.
At 106-105 level Japanese products face significant price disadvantages in US - its largest export market. With China keeping its currency pegged to the dollar, operating on a de facto dollar standard, Japanese goods become progressively more expensive in the country’s 2nd largest export market as well. Given tonight’s disappointing Industrial Production data, BOJ will not allow this price dynamic to continue for long.
We will not know until much later if BOJ actually broke custom and bought dollars when price slid through the 106 level today or if the USD/JPY rally was simply a result of a yen bull trap by the dealers who have had to become significantly net long the yen over the past few days as the pair continued its downward descent. However as we stated yesterday, at these levels traders ignore BOJ warnings at their own risk.
FX Spot Overnight
- EUR still churning at 2700 level as the pair digests recent euro strength
- JPY breaks the 106 handle but quickly retraces back to 106.50 on short covering
- GBP consolidates at the 8300 handle as eco data in-line
- CHF bounces between 2000 to 2050 as market tries to ascertain SNB rate policy intentions
12:00GMT – (8:00 AM EST) NZD NBNZ Business Confidence (OCT) Expected, Previous –20.8%
12:30GMT – (8:30 AM EST) USD Initial Jobless Claims (OCT 23) Expected 335K, Previous 329K
12:30GMT – (8:30 AM EST) USD Continuing Claims (OCT 16) Expected, Previous 2798K
12:30GMT – (8:30 AM EST) CAD Industrial Product Price m/m (SEP) Expected -0.4%, Previous 0.1%
12:30GMT – (8:30 AM EST) CAD Raw Materials Price Index m/m (SEP) Expected 1.8%, Previous 3.3%
12:30GMT – (8:30 AM EST) CAD Business Conditions Orders (OCT) Expected 8.0, Previous 6.0
14:00GMT – (10:00 AM EST) USD Help Wanted Index (SEP) Expected 37, Previous 37
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