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Yen crosses weakened mildly in the Asian session today on profit taking, following a retreat
in equities. The Japanese yen is also weighed down mildly by comments from Japanese Economics
Minister Amari, who said that excessive weakness in the yen could "cause a spike in import
prices". And while it benefits exports, it would have "harmful effects on people's livelihoods".
It now looks like the overstretched yen crosses are losing upside momentum and needs to consolidate
the recent sharp rise. Nonetheless, there are strong expectation that the Bank of Japan
could expand its easing program next week and double the inflation target to 2%. And
there are risks that the central bank could surprise the markets by doing more. The current
retreat in yen crosses are generally viewed as consolidative and there is no change in
the near term bullish outlook.
While the Euro turned sideway against the dollar and retreats against the yen, it remains
strong against the Swiss Franc. Indeed, Euro Swiss Franc jumped further to as high as 1.2384
so far today and the recent rally is set to extend to the 1.24 level. While there was
not much fresh news on the pair, it's believed that markets are starting to unwind the so
called "eurozone breakup" trades as the new year has started and peripheral yields have
largely stabilized since the E-C-B's O-M-T announcement last year. And, the solid Spanish
bond auction earlier this month has also given investor confidence a strong boost. News from
the Eurozone this week was so far positive. S&P raised the outlook on both Luxembourg
and Finland to stable, from negative, and affirmed both countries' top rating.
In the U-S, Fed Chairman Ben Bernanke said that whilst there are some positives signs
of improvements in the economy: "there is still quite a way to go". He also noted that
quantitative easing is having a positive effect on bringing longer-term rates down pretty
significantly and is an effective tool. Regarding inflation, he said that he didn't see much
evidence of that and expressed his confidence that the Fed has all the tools to "undo our
monetary policy stimulus.... before inflation becomes a problem. Overall, Bernankey's comment
didn't change the expectation that the Fed wouldn't exit from its policy easing until
at least the end of 2013.
Regarding the so called debt ceiling issue, Bernanke urged Congress to raise the ceiling
to "avoid a situation where our government doesn't pay its bills." And, "we're not out
of the woods because we are approaching a number of other fiscal critical watersheds
coming up,". He also said "the way to address it is to have a sensible plan for spending
and a sensible plan for revenue." President Obama criticized that "to even entertain the
idea of this happening, of the United States of America not paying its bills, is irresponsible
and absurd." Obama noted that "while I'm willing to compromise and find common ground over
how to reduce our deficits, America cannot afford another debate with this Congress about
whether or not they should pay the bills they've already racked up."
Atlanta Fed Lockhart said yesterday that the Fed's open-ended Quantititive Easing does
not mean its without boundaries. He warned that "growth of the Fed's balance sheet could
have longer-term consequences that are worrisome". he noted that "there is a risk, given the
Fed's cumulative share of the Treasury and Mortgage Backed Securities market, that at
some point securities purchases could have adverse effects on market functioning and
financial stability." And "the Federal Reserve's net income and its remittances to the Treasury
could be significantly affected during the period of policy normalization."
Looking ahead, inflation data will be the main focus inthe European session as the UK
year in December. A number of important economic data reports will also be released from the
U-S, including Empire State manufacturing, retail sales and P-P-I.