Market Rumours

USD/JPY's tight range of 50 ticks Wednesday may give the impression that thin Christmas markets have arrived, says Mizuho Corporate Bank's Nicole Elliott. However, don't be lulled into such an idea, Elliott says. She is looking for a sharp drop, and a serious test of key support at 87.00 and 85.00 through to December. For a strategy, she favors selling at market, adding at 89.50, with a stop above 89.75, looking for 88.00 and 87.00 on the downside. USD/JPY now at 89.00.

The U.K. public sector reported its largest deficit on record in October, while tax receipts fell for the 13th successive month and welfare costs surged, underlining the continuing deterioration of the government finances. The Office for National Statistics reported Thursday that the public sector borrowed GBP11.4 billion in October, the first deficit recorded for that month since records began in 1993. The figure compared with borrowing of GBP0.1 billion in October 2008 and comfortably overshot economists' forecasts of GBP7.0 billion. With the U.K. economy in its sharpest recession in decades, PSNB in the first half of the financial year, which started in April, reached a record net GBP86.9 billion. That is more than twice the GBP33.9 billion in the year earlier period, which was the previous record. Public borrowing is already forecast by the U.K. Treasury to reach GBP175 billion this year but the figures could have to be revised higher by Chancellor Alistair Darling in December's Pre-Budget Report. The worse-than-expected October figures come a day after the U.K. government unveiled a Fiscal Responsibility Bill--which would put plans to cut by half the UK's ballooning deficit within four years on a statutory footing.

Economists at Wells Fargo Securities say Santa is going to tighten his belt another notch this holiday season. They forecast retail sales will drop 0.8% this year, marking the first back-to-back declines since records were kept in 1993. They say retailers have stocked lots of lower-priced merchandise. And many have kept relatively lean inventories. As a result, Wells Fargo says, "door-buster deals may be more limited this year."

USD/JPY down as Japan exporters sell, substantial amounts of sell orders below 89.50 placed by players defending options with strike at that level, which likely to expire later in day, says senior trader at major Tokyo bank; but adds "with a lack of major trading factors in Asia, the downside for dollar-yen is limited." Tips USD/JPY support at 89.00, then 88.50, vs 89.18. EUR/JPY falling in tandem with USD/JPY, coupled with Nikkei decline (last down 1%), fueling risk aversion. EUR/JPY downside at 132.80, then 132.50 vs 133.04. Eyes EUR/USD floor at 1.4900 vs 1.4920.

1-month ATM USD/JPY implied volatilities hit around 10.85%, lowest level since late August 2008, vs around 11.25% NY overnight, as demand for hedges declines amid spot staying in narrow band. "With the absence of leads, players are unsure if it's good to buy the yen, prompting traders to keep selling hedges," says options trader at major Tokyo bank. Implied volatilities may decline to 10% in coming days. This decline likely driven on views sharp fluctuation in USD/JPY unlikely ahead of Japan's three-day holiday (starting Saturday), U.S. Thanksgiving holiday Nov. 26, one player interested in selling 6-month ATM USD/JPY straddles at 13.05%, he says.

EUR ticks down vs USD, JPY, but may rise again if Philadelphia Fed manufacturing index, weekly jobless claims (both due later) add to expectations that U.S. economy on track to recovery, says Royal Bank of Scotland strategist Akane Uchida; EUR/USD's topside at 1.5000 vs last 1.4940, EUR/JPY at 134.50 vs last 133.41. Although Nikkei last down 1.3%, weighing on risky EUR, "there's a broad trend that overall market sentiment has improved" from previous months with higher commodity prices, stronger data. Players want to try upside for EUR vs USD; rise to 1.5500 possible into next year. Focus also on ECB Trichet's speech in Paris at 1600 GMT.

EUR/USD, EUR/JPY may decline if Nikkei tracks lower U.S. stocks overnight, fueling risk-aversion, says Gaitame.com chief analyst Daisaku Ueno. Says solid recovery in stock, commodity markets uncertain amid slow economic recovery, meaning topside for EUR remains heavy in near term; "under this environment, we can't say bullish sentiment has come back." Tips EUR/JPY in 133.00-134.50 band vs 133.62 last; EUR/USD in 1.4800-1.5030 range vs 1.4962. Meanwhile, USD/JPY may stay in 88.50-89.50 range vs 89.31. Pair lacks direction as both considered as safe-haven currencies; when risk-aversion emerges, both units likely to be bought.