Forex Analysis: Yen May Extend Rally as Risk Appetite Comes Undone

The Japanese Yen may extend gains as haven demand returns, compounding cautionary official commentary warning against excessive weakness.

Talking Points

Japanese Yen Soars as EconMin Amari Warns Against Excessive Depreciation
British Pound Volatility Unlikely as UK CPI Data Reinforces BOE Status Quo
Risk Appetite May Suffer on Fear US Austerity to Undermine Global Growth

The Japanese Yen soared in overnight trade, adding as much as 1.1 percent on average against its leading counterparts, after Kyodo Newscited Economy Minister Akira Amari saying excessive weakness can be a drag on the economy. Amari argued the Yen is at a “pretty good level” now and warned that depreciation beyond ¥100 to the US Dollar will unduly raise the price of imports and hurt consumers. The remarks suggested the newly-minted LDP administration may not be as keen weaken then Yen as has been reflected in recent trade, driving profit-taking on short positions.

December’s UK CPI report headlines the economic calendar in European hours. Expectations suggest the year-on-year inflation rate will remain unchanged at 2.7 percent for the third consecutive month. As such, the outcome is unlikely to yield much in terms of Bank of England policy implications, suggesting its impact on the British Pound is likely to be limited at best. Later in the day, the spotlight turns to the US calendar where, where December’s Advance Retail Sales numbers are set to come across the wires. Economists expect receipts to rise 0.2 percent, marking a mild deterioration from the prior month but printing close enough to the medium-term trend average to command limited attention from investors.

On the sentiment front, S&P 500 index futures are pointing cautiously lower to suggest a risk-off mood may be taking shape. While such an outcome may offer further support to the Japanese Yen as well as the likewise safety-linked US Dollar, the magnitude of overnight weakness is not sufficiently compelling to draw firm conclusions. As we discussed yesterday however, the temporary lull in big-ticket event risk may give traders an opportunity to ponder on-coming headwinds from US austerity as the “debt ceiling” and “sequester” battles draw closer. If this proves so, a potent spark for risk aversion will have been found.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

20:30

NZD

REINZ Housing Price Index (DEC)

3522.7

–

3544.4

20:30

NZD

REINZ Housing Price Index (MoM) (DEC)

-0.6%

–

1.4%

20:30

NZD

REINZ Housing Price Index (YoY) (DEC)

8.2%

–

24.1%

21:00

USD

Fed’s Bernanke Speaks in Michigan

–

21:45

NZD

NZIER Business Opinion Survey (4Q)

–