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Market defaults to an even weaker JPY as EUR/JPY breaks to new 7-year high. We remain at Defcon 1 with this JPY in a blow-off weakening phase.
Jury still out on EUR/USD as rangebound activity enters its second month. Few catalysts on the economic calendar this week. But next Tuesday's FOMC is a big one.
MAJOR HEADLINES – PREVIOUS SESSION
• Japan Capital Spending advances 10.6% in Q3 vs. 6.0% expected
• Australia Company Operating Profis grow 3.9% vs. 3.0% expected and vs. 11.6% in Q2
• Gold touches new 25-year+ high overnight.
• Japan’s MoF not worried about JPY decline. “Reflects fundamentals.”
JPY still very weak – EUR/JPY reaches new 7-year high, USD a bit stronger again.
THEMES TO WATCH – UPCOMING SESSION
The JPY continues to get pummeled as it looks as though it will be consigned to oblivion soon. A study of past moves in the JPY suggests that the end of this action must be nigh - previous buying sprees/sell-off's of the JPY have almost never lasted this long (3 months) without significant correction. We can't help but think that there is some kind of link between the JPY, the strong Japanese equity market, and the gold market going haywire. There is some noise out there about Asian demand for gold (but there also may be a link with gold and China's short copper position debacle). In any case, we're concerned about the market here as the JPY is extraordinarily stretched. The latest catalyst for the JPY moving weaker was a comment by the MoF's Tanigaki that he was not concerned by the move to a weaker JPY and that this move simply "reflects fundamentals".
One thing that does make sense on a fundamental basis is EUR/USD declining a bit as US rates rose late last week while while those in Europe fell - though it's a bit odd to suddenly see the currency market listening to the rate differential fundamentals after ignoring them for a long time. We have little reason to believe that US rates will head any higher (in fact, we're strong believers that the Fed is about to signal the end of the rate hike cycle) so any strengthening in the USD advantage in rate differentials could suddenly reverse.
There are few data catalysts this week, but next week we have the absolutely key FOMC meeting - in fact the next two Fed meetings are probably the most important meetings in recent memory.
As we enter the last 20 trading days of the year after more than a month of rangebound activity in EUR/USD - we think we could see a resolution to the "which way" question before the New Year. Even if EUR/USD breaks lower, we think a quick reversal could come in that will eventually pull it higher - with the days just before or just after Dec. 13th are a likely area to look for a big commitment in the USD picture.
Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.
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