Japan's PM warns on JPY appreciation and puts JPY back on defensive. UK key RICS housing survey even worse than expected

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• Japan's Prime Minister Fukuda warned that the JPY is appreciating too rapidly 
• Japan's BoJ voted 8-1 to keep rates unchanged at 8-1 at its rate setting meeting 
• Japan Q3 GDP out at 0.6% QoQ vs. 0.5% expected
• UK RICS House Price Balance out at -22.2% vs. -18.0% expected
• Australia Oct NAB Business Confidence out at 9 vs. 7 in Sep.
• China Oct Consumer Price Index out at 6.5% YoY vs. 6.3% expected

THEMES TO WATCH – UPCOMING SESSION

Key event risks today (all times GMT):

• Sweden Riksbank Minutes from Oct 29 rate meeting releases (0830)
• UK Oct CPI/RPI (0930)
• Germany/Eurozone ZEW Survey (1000)
• US Pending Home Sales (2000)
• US Weekly Consumer Confidence (2200)
• Australia Westpac Consumer Confidence (2330)
• Australia Wage Cost Index (0030)
• China Retail Sales (0200)

Market Comments

A rare bout of good news from Japan as the GDP numbers came out better than expected on better than expected consumer spending. Still, exports, which are vital for Japan's growth, showed worrying signs of slowing. Also, the PM is already out with Japan's first round of verbal intervention with USDJPY trading around the 110 handle. This seems to be a psychologically important area for exporters and officialdom with Japan's economic prospects so reliant on exports considering its moribund domestic scene. Recall that the lows in the brief spring 2006 EM blowout was 109 in USDJPY, which we almost exactly touched yesterday. Volatility is ensured short term, in any case!

Elsewhere, we've seen a first big wave in USD strength yesterday, and that is fading rather sharply today on collateral damage from the weaker JPY overnight. The risk-willing trades could bounce back sharply here, but the pressure will remain on the JPY crosses further out as long as things at the end of the tunnel don't turn lighter.

More subprime worries yesterday with the implosion of E*Trade and ugly words from various corners of the market, including Blackstone. Fitch also announced a huge downgrading of CDO structures. This theme is ongoing - the question being if it can get any worse with so much dirty laundry already aired. What we need to keep the global slowdown theme going is to see the actual economic data showing signs of slowing.

One curious victim of the bout in risk reduction has been SEK, which has weakened against EUR rather sharply over the last two weeks. Today we see the release of the Riksbank minutes, as the Riksbank has shown signs that it will continue to tighten and bring the rate to parity with Europe. The CPI number from Sweden was also higher than expected yesterday. Consider EURSEK shorts and NOKSEK shorts if you'd like to keep things strictly Scandinavian (NOK a big loser in this environment after the CB adjusted down growth and inflation expectations the last time around and as oil is coming off sharply). 2-year rate differential developments suggest that EURSEK is very mispriced and could be headed for another good sized sell-off. It's also a nice trade if you'd like to keep away from the JPY volatility. Yesterday's technical developments suggest that EURSEK may have put in a top here.

The RICS housing data, which we consider the most forward indicator on the UK housing market, was out even worse than expected and this buttresses the weak GBP theme. The next resistance levels are 0.7107 - the Dec 04 high, and 0.7254, the 2003 and 10-year high. We see little real resistance to the upside for the duration in EURGBP - a significant repricing of GBP may be unfolding here. Today we have the two big inflation numbers from the UK on tap.

Charts: EURJPY and EURSEK

EURJPY: are we going to see yet another dramatic turnaround after a scary sell-off or is this just a short squeeze on verbal intervention? Key levels to watch here as the JPY crosses rally are the 200-day and 55-day SMA's at 161.66 and 162.72 respectively. Also, 162.10 is the first Fibo retracement for the bounce.

EURSEK: the last two days of blow-off highs that don't hold combined with the fundamental underpinnings of interest rate differentials favoring a strong SEK could mean that EURSEK has put in a top for now. The pair hasn't been able to put in a session close above 9.3000 so far, and 9.2350 comes in as an interesting flatline support area, with the rising consolidation line a bit higher. A break through support levels could usher in a try at the recent lows. To make things even more interesting, the 55-day SMA comes in around 9.2600.

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.