Market Rumours

Tuesday's UK inflation data marks the beginning of an upward trend for headline inflation over the next few months, says Jonathan Loynes, chief European economist at Capital Economics. However, he says underlying price pressures should remain weak, with the main upward forces coming from rising food and energy prices in the months ahead as well as the coming increase in VAT. "No doubt this will fuel concerns that quantitative easing is stoking inflation. But we remain convinced that the vast amount of spare capacity in the economy will keep underlying price pressures subdued for a prolonged period."

EUR/USD, EUR/JPY continue to slip as weak regional share markets (Nikkei closed down 0.6%) prompt short-term players to cut exposure to risk-sensitive EUR, says senior FX dealer at major Japanese trust bank. Adds, USD got some support against EUR, other rivals due to lack of fresh comments on CNY by U.S., Chinese presidents after bilateral talks in Beijing. Dealer says, "there were expectations that there could be new comments about yuan appreciation, but the fact that there weren't gave the dollar some relief," due to increased speculation any CNY rises would push USD down further. Tips EUR/USD first support at 1.4930, with any breaches opening way to 1.4900; pair last 1.4941. Says EUR/JPY initial support at 132.85, though could target 132.00 if it breaks that; last 133.13.

As global economy bottoming and risk appetite recovering, players will keep paying attention to policy rates around world for good investment targets; USD, JPY currently weak as both nations' interest rates likely to remain low for months. But Daiwa Institute of Research's Yuji Kameoka says speculation of FOMC's rate hike should spread in market in January-March period vs his expectation of Fed's next rate hike in 2Q 2010. BOJ, meanwhile, may not be able to hike rates until later, possibly 2011, as Japan's price trend to remain weak for years. "The yen will be the only weak currency among the major units in 2010," Kameoka says. "The world will be talking about yen-carry trade again instead of (the current) dollar-carry trade."

USD in weakening trend as suggested by USD Index, says RBC. USD Index falls below 74.75 overnight, which house says "would raise the risk of a disorderly decline in USD." Index now 74.836. FX players don't expect USD will get much support from anywhere for now as Fed expected to keep its rates ultra low for months, decreasing USD's appeal as an investment target. Some says high-yielding units such as AUD, EUR "safest bet" to go long.

Dollar/yen options rose in Tokyo Tuesday due to increased demand for hedges, with investors seeing a weaker dollar and stronger yen due to the Federal Reserve's dovish stance and potential spillover from political pressure on the yuan. Benchmark one-month at-the-money dollar/yen implied volatilities increased to 11.55% from 11.15% in New York Monday. The greenback stood at Y89.04 as of 0200 GMT, after briefly hitting a five-week-low of Y88.75 overnight. Currency players want to sell the dollar and buy the yen, dealers said, adding that a break below the technically important Y88.50 mark is likely to occur soon, opening the way to this year's low of Y87.10. "You don't want to buy a lot of dollars because the Federal Reserve is unlikely to hike rates for the next 12 months or so," said an options dealer at a major Japanese bank.

Double dips: Good when it comes to ice cream, not when it comes to economics. Japan, unfortunately, isn't known for its ice cream. 3Q Japan GDP figures show stimulus measures had desired effect, luring shoppers into car dealerships and electronics stores, capital investment rebounded and exports to Asia strong; all told, GDP expanded 1.2% in period. With that, though, caveats begin. Government incentives have been a key driver of growth, and as they fade, household spending on fuel-efficient autos and energy-saving electronics is likely to slump. Counting on sustained foreign demand is equally tricky; key U.S. market's recovery remains tenuous with unemployment still rising and consumer sentiment down sharply. Perhaps uniquely Japanese among the risks, though, is deflation. The domestic-demand deflator fell 2.6% - largest drop since 1958 - indicating companies losing ability to price goods and services. With another election expected next year, Tokyo's discussing another pump-priming package to offset demand slump. But with other Japan engines still shaky, it might not be the last.

JPY rising vs USD, EUR as players buying ahead of meeting between China, U.S. Presidents, which may lend upward pressure to CNY, then JPY and other Asian units, says senior sales dealer at major Japan bank. USD/JPY initial support 88.75 vs last 89.04, EUR/JPY initial support at 133.00 vs last 133.26. AUD falling even though hawkish RBA minutes suggest more rate hikes to come; dealer notes "such a tone in the minutes was widely expected, so it's a typical buy on rumor and sell on fact thing." AUD/JPY last 83.24 vs 83.58 intraday high.

Volatilities implied by 1-month ATM USD/JPY options up to 11.30%/12.00% vs 10.85%/11.55% in NY overnight as demand for USD downside hedges has increased after pair touches 88.75, lowest level since October 9, says options dealer at major Japan bank. Adds Fed Bernanke's latest comment repeating Fed to keep rates low for "extended period" weighs on USD. Expects vols to rise more if pair falls below 88.50 as that suggests pair may break below 88.00 in near term; adds 1-month options with 87.50 strike becoming popular.

USD/JPY biased downward, selling led by non-Japanese speculators, says senior sales dealer at major bank in Tokyo. Adds "no reason" to buy JPY aggressively if Japan's weak economic fundamentals taken into account, worsening fiscal conditions; yet non-Japanese players' buying of JPY as hedge to counter declines in Japanese stocks good enough to keep pushing pair down for now, he says. Adds speculation FOMC won't hike rates for now also weigh on pair. "The safest bet for now is buying the euro." Adds USD/JPY may trade in 88.30-89.30 range vs last 88.99.

Buffett, Soros Go Shopping At Wal-Mart: Seems Wal-Mart has broadened its appeal during the recession. Two of the best-known investors in the world, Warren Buffett and Georg Soros, bought a lot of Wal-Mart (WMT) stock in the third quarter. Buffett boosted his stake to $37.8 million shares on Sept. 30 from 19.9 million on June 30. And Soros raised his stake to 1.1 million shares at the end of the third quarter from a little less than 90,000 at the end of the second quarter.

Speaking on CNBC, banking analyst Meredith Whitney says she'll grow more positive on stocks only after the market drops, and hasn't been this bearish in a year. Whitney told the network she now expects to see a "double-dip" recession, and predicts that bank shares will return back to tangible book value, implying a sizeable drop for a number of big financial stocks. Comments follow a bearish note last week predicting that banks will chop consumer credit further still, and that tight credit is a "predominant" reason she remains cautious on consumer spending.

Fed chairman Ben Bernanke's rare comments about the US dollar show he's finally doing "what any self-respecting central banker does, admit that the weakness of the reserve currency of the world matters," Miller Tabak equity strategist Peter Boockvar says. "Jawboning is one thing, but until the world sees actual action, the dollar will remain in secular decline," he notes. "But today's comments may be enough to halt its current fall for now. Money will go where its best treated and monetary and fiscal policy in the US is not currently treating the dollar well (an understatement I know) relative to other countries."Bernanke also says the government's current budget deficits are unsustainable, even as they are unsurprising given the challenges the economy has confronted. He says government officials need to lay out a plan that will show how they will be returning deficits back to a more sustainable level.