Market Rumours

USD/JPY spiked higher Thursday, but Barclays Capital says with intraday charts overbought and price action resembling that seen in August it has nagging doubts regarding further gains. Now at 88.96, bearish pressure will be alleviated on a break above 89.10, says the bank, but in the meantime it sees risk toward trendline support at 87.95 and on a break here, 87.10 and 86.80.

The slide in EUR/USD isn't the only thing that has stalled. Calyon notes that if the forex options market had expected the trend to be extended, the price of front-month contracts would be rising. "The fact that they have not either suggests the options market is in denial about a new downtrend in EUR/USD or they believe the lurch lower is at an end. Once again, the market is waiting for resolution," the bank says.

There has been very little movement in the major currency pairs again overnight. The DJIA closed up 0.7%, and that combined with earlier hawkish signals out of Australia and New Zealand lent the risk currencies a prop. Asia's bourses mostly ended higher, with the Nikkei adding a credible 2.5% although the Shanghai Index slipped into the close, ending 0.2% lower. Moody's brought a little cheer to the U.S. and UK, saying it had no plans to revise their Aaa ratings for now, but a worst case scenario could see a cut in 2013. This lent sterling a small bid tone, although GBP/USD struggled to hold above 1.63, EUR/USD ranged between 1.4700 and 1.4740, and USD/JPY headed back towards 89.00 after a raft of strong Chinese data trimmed the need for the JPY's safe haven qualities. For Friday the data slate is light, and the most exciting event is ECB President Jean-Claude Trichet speaking at 1215 GMT

Investors are looking ahead to tonight's U.S. retail sales data, says IG Markets analyst Chris Weston, as may be key to how USD trades heading into 1Q 2010. "A good number tonight (market pricing in +0.6%) could spur buying in the dollar as the Fed will certainly look at consumer patterns in determining the merit of future hikes," Weston says in an e-mail. "Employment and retail spending obviously have huge correlations so it is feasible to suggest they will be viewed in the same light by currency traders." Since Lehman's collapse, better-than expected economic data have benefitted AUD but a stronger data/higher USD trade became evident after last Friday's strong U.S. jobs numbers raised expectations for Fed rate hikes.

USD likely to rebound in 2010 as U.S. economic data likely to continue "to surprise to the upside and the end to the Fed's asset purchases program pushes U.S. rates higher," says Barclays Capital fx strategist David Forrester. USD also likely to gain in January-March as "long risk trades will start to look like a fatigued footballer in extra time." For these reasons, elevated USD risk premium should shrink. Against JPY, USD fortunes helped further by Japan's "latest policy response to the appreciating JPY;" BOJ recently implemented new fund provision steps that dragged JPY interest rates down. Taken with government rhetoric against JPY strength, move has helped "reduce the perception that USD/JPY is a one-way trade." To take advantage of likely higher USD/JPY ahead, recommends buying USD call/JPY put.

What's happened in Greece, whose sovereign credit rating was dropped this week by Fitch Ratings to BBB+ from single-A-minus, may not have such far-reaching consequences, but it's surely rattled the complacency of bulls looking for an economic revival from abroad. There are many issues at play, many of which will remain obscure to most American investors but are still pretty important. The slashed debt rating is likely to trigger higher sovereign borrowing costs. That increase could widen the fissures in the 16-member euro zone, whose currency is high relative to the dollar and whose relative stability has been a benchmark of success during the global recovery. Now, Greece, an economically weak member of the euro zone, threatens to test a host of European Union and European Commission rules that are the bulwark of what makes the unified currency work. When the euro was being launched, the euro zone's members bent and stretched their own rules on the ratio of budget deficit to gross domestic product in order to bring the currency to life and retain all of its members. This was particularly difficult during the economic weakness of the late '90s. But the understanding was that as long as the stronger economies in the zone remained stable, the euro would be a viable currency. The recession is testing that philosophy. Take Ireland, for instance. The country blew past the 3% ratio in the spring and has since embarked on a set of austerity measures which kept its deficit going to a worst-case 13.5% of its GDP by next year. Robert Brusca, head of Fact and Opinion Research, says even the strongest euro-zone economies are weaker than they appear. He said France, the perennial No. 2 to Germany, will need until 2013 to get its finances in order to meet the strictest criteria of the Maastricht Treaty, the 1992 pact that created the European Union. "When you look at the euro zone, there are a lot of troubled countries," Brusca says. "If there's one thing that's positive, it's fortunate for Greece to be in the euro zone so the drachma doesn't get pounded in the foreign currency markets."

JPY likely to get boost from Volkswagen's capital alliance with Suzuki Motor, says Minoru Shioiri, chief manager of FX trading at Mitsubishi UFJ Securities. Says while scale of any bump difficult to gauge due to "the secretiveness over these kind of flows," Volkswagen's purchase of 19.9% stake in Suzuki for $2.5 billion "should contribute to yen appreciation." Adds JPY-positive effects from alliance, scheduled to be completed in January 2010, expected into early next year; but adds beyond "the initial flow into Japan" that should support JPY, impact on other units from flows related to transaction not yet clear. USD/JPY last 88.38. Shioiri says likely capped at 88.50 for Asian trade.