Forex Market Update

Pound rebounds on Dubai debt repayment news. JPY rebounds on strong Tankan, Bunds rally.

USD and risk appetite not paying attention to one another ahead of Wednesday's FOMC.

MAJOR HEADLINES – PREVIOUS SESSION

Headlines – previous session

    * New Zealand Nov. REINZ Housing Price Index rose +0.2% MoM vs. 1.3% in Oct.
    * New Zealand Nov. REINZ House Sales rose 41.5% YoY vs. 36.3% in Oct.
    * New Zealand Nov. Performance of Services Index rose to 56.0 vs. 49.9 in Oct.
    * Tankan Q4 Large Manufacturer's Index rose to -24 vs. -27 expected and -33 in Q3
    * Tankan Q4 Non-manufacturing Index rose to -22 vs. -23 expected and -24 in Q3
    * UK Dec. Rightmove House Prices rose 1.7% YoY vs. 1.6% in Nov.
    * Switzerland Nov. Producer and Import Prices fell -3.3% YoY vs. -3.1% expected and -4.7% in Oct.
    * EuroZone Oct. Industrial Production fell -11.1% YoY vs. -10.8% expected
    * Canada Q3 Capacity Utilization Rate out at 67.5% vs. 67.0% expected and 67.7% in Q2


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

    * UK Nov. RICS House Price Balance (0001)
    * Australia Q3 Dwelling Starts (0030)
    * Australia RBA Dec. Meeting Minutes (0030)
    * New Zealand Nov. Non-resident Bond Holdings (0200)

 

Market Comments:

The Yen caught a tailwind to open the week on a much stronger than expected Q4 Tankan survey and on assist from Bunds, which rallied strongly in the European session after last week's rather steep sell-off. An interesting juxtaposition of article on our Bloomberg terminal this morning as one article proclaims "Yen Favored for Carry Trades as Japan Faces Deflation", while another shouts "Why Japanese Government Bonds Yielding 1.3% Offer World's Highest Returns". The former article is rather interesting as it argues that Japan could become the funding currency of choice for carry trades as its Libor rate drops below the US rate. Another potential JPY negative in the New Year is fiscal concern as the government looks to stimulate its way out of a new deflationary rut with heavy spending that will only add to the world's heaviest public debt burden. This could be a growing theme in 2010 and we may have seen a "distant early warning" of this with the large recent rally in USDJPY. The latter article simply points out that Japanese debt was the world's best performer in November due to the Yen strength. The flipside of deflation is, of course, that each unit of a currency in a deflationary country becomes more and more valuable over time - and this is the paradox of the carry trade and trying to sell low yielders.

Pound rebounds on Dubai bailout
Abu Dhabi agreed to shovel $10 billion dollars into the real estate black hole of Dubai World, which allowed the latter to make good on debt payments that come due today and to buy time in an effort to renegotiate the terms of other debt. This boosted the pound overnight, with EURGBP trading back below 0.9000 at times in the European session after a weak close on Friday . Tonight we get the RICS House Price Balance from the UK. It is hard to believe that UK housing has come full circle and is actually appreciating in price on YoY comparisons. The RICS balance has fast reached close to the peak of its historical range.

Chart: GBPUSD
Three days in a row of indecision for GBPUSD heading into today. The recent break of the 1.6250 neckline-like area failed to generate a firmer southerly push for the pair, but neither was there a strong upside reversal. The recent low just below 1.6200 was very close to the key 0.618 Fibo, so that level will be in focus on any further weakness.  A break could lead to a test of the 200-day moving average, which is fast rising toward the 1.6000 handle. To the upside, bears would be discouraged by any close back above the 1.6350/75 area.