JPY crosses bounce back from the abyss once again

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• US equities closed sharply lower at new lows since August, while Japan's market bounced sharply from new lows and JPY crosses also bounced in the Asian session.
• US 2-year note benchmark closed below 3.00% for the first time since late 2004
• UAE lowers rates in line with the Fed to temper revaluation speculation

THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):

• US Markets Closed for Thanksgiving Holiday.
• Switzerland Q3 Employment Level (0815)
• Swedish Riskbank's Nyberg to Speak on Credit Turmoil (0900)
• UK Q3 Total Business Investment (0930)
• ECB's Trichet out speaking on French television (1630)
• UK BOE Deputy Governor Lomax to make speech (2000)

Market Comments

Developments in US markets took the headlines again yesterday, as equities turned south rapidly into the close ahead of the long weekend (for most, as Thursday markets are closed and some markets in the US open for a half day on Friday). This also meant that US rates closed sharply lower and underlined the bearish case for the USD in terms of rate differentials with Europe, among others. But the JPY strengthening was halted for the short term once again Japanese importers were apparently out overnight locking in JPY at these relatively elevated levels. This pulled the JPY crosses back from the brink once again, as the cross/JPY pairs have been near impossible to trade of late. EURJPY, for example, crossed the important 160.50 threshold yesterday and posted minor new lows before storming back higher for the sixth consecutive day of sharp direction changes. The 55-day SMA comes in just above 163.00 and seems vital resistance for the cross, which we prefer lower eventually as the global move away from carry takes hold (the final exhaustion of the EURUSD rally will also be important for any big EURJPY unwind).

EM currencies are certainly responding to the risk aversion theme as EUR/CEE currencies are moving higher. Could EURISK be a leading indicator for what awaits many of the EM currencies? Of course, the recent S&P downgrade was not helpful, to say the least, in the specific instance of ISK. In G10, AUD is bearing the brunt of the "slowing global growth" theme, as it should. AUD/USD just crossed the 0.8750 threshold, but with the USD under so much pressure elsewhere, volatility could mean that the path lower could be a rough one.

As we noted in the headline of this publication, EUR/USD saw a large rally over Thanksgiving in both 2004 (Wed close 1.3186, Fri Close 1.3296 for a new high) and especially 2006 (Wed Close 1.2942, Fri Close 1.3093), so don't count out the period as a quiet holiday time, but rather as a nervous one... 

It's tough to say whether this will happen this year, though the ingredients are there with the rather panicky close yesterday in US markets. In general, with the very poor liquidity conditions of late and the holiday only making matters worse, moves could be erratic and exaggerated.

The next key focus is the next round of CB meetings, especially the Fed's on Dec 11. Again, we note the contrast between Fed rhetoric, which has consistently begun to mention the risks of a weak USD,  and the market's very aggressive view that further sharp interest rate easing is ahead. A Dec 11 "no cut" is a rather tantalizing idea, even if it's a very long longshot at this point.

Charts: NZDUSD

Is NZD the "next one to go"? In the carry universe, NZD has actually done relatively well of late considering it is usually the first one to get hit on risk aversion - like we saw in the August credit crunch. Perhaps the focus on AUD and AUDNZD selling has been keeping NZD a bit artificially elevated. We certainly have a hard time with a strong NZD in a risk averse market. For NZDUSD, a series of important supports are coming into view: the "neckline" like area defined by the blue line below, and the 55-day (in red) and 200-day (in black) moving averages. A fall through this zone of support could open up considerable downside.