Euro Extended Correction, Yen To Be Back Under Pressure On BOJ

There was no unified theme in the markets last week. The Japanese yen was the weakest currency in the early part of the week on speculation of imminent BoJ easing. But yen then rebounded strongly as disappointing corporate earnings triggered selloffs in equities. Mean Kiwi, Aussie and Sterling were boosted by different factors in spite of risk aversion. Buying of these three currencies in crosses kept Euro pressured against dollar. Canadian dollar, on the hand, weakened after flip-flopping for a while. Looking ahead, we'd expect the yen to be back under pressure as BoJ announce approaches. Also, employment data as well as ISM from US will probably rock the risk markets too and trigger volatility in FX.

The October FOMC meeting contained few surprises. Policymakers decided to keep the fed fund rates and the QE3 program unchanged. Some positive comments were made regarding economic developments though. For instance, the committee upgraded its assessment of household spending to 'has advanced a bit more quickly' in October from 'continued to advance' in its September statement. Moreover, Richmond Fed President Lacker seemed to have changed his stance modestly. We expect the Fed to expand the size of asset purchases by US$45B in December so as to maintain a constant pace of buying after completion of Operation Twist. More in FED Maintains Status Quo, Upgrades Economic Assessments Modestly. The US economy expanded at a pace of 2% annualized rate in Q3, comparing to expectation of 1.8% and Q2's 1.3%. Meanwhile the GDP price index rose 2.8% versus consensus of 2.0%.

In Eurozone, preliminary findings of troika showed that Greece needs additional EUR 16b to EUR 20b in funding if the fiscal adjustment program is extended for two-years. That's a bit higher than Finance Minister Stournaras' estimate of EUR 13-15b. An unnamed European official was quoted saying that there is no chance Greece could bring debt down to 120% of GDP in 2020. Instead, its would be at 136%, under a positive scenario of "a primary budget surplus, a return to economic growth, and privatization". And, it's estimated that additional EUR 30b additional financing is needed. To cope with the additional funding needed, a option is to reduce the interest rates on loans to Greece.

Another option is to bring forward some payments from IMF. Stournaras said on Wednesday that Greece had already be granted the extension but European officials have already denied that. The decision could be made at the net EcoFin meeting in Brussels on November 12. Moody's downgraded ratings on five Spanish regions, noted that the downgrades were "driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs."

Eurozone PMI manufacturing unexpectedly dropped again to 45.3 in October while services PMI just showed mild improvement 46.2. Both were below expectations of 46.5 and 46.4 respectively. The composite PMI dropped to a 40-month low of 44.8. German PMI manufacturing dropped to 45.7 while PMI services dropped to 49.3. German Ifo business climate dropped to 100 in October, lowest since February 2010 while current assessment index dropped to 107.3. Expectations gauge was unchanged at 93.2. The data clearly indicate that recession is set to continue in Eurozone and Germany won't be immune.

Speculation of additional easing from BoJ, as soon as on it's meeting next week, intensified further. its reported that BoJ officials are already discussing additional measures to boost recovery that include expansion of its asset buying program. Meanwhile, political pressure continues to be on the central bank. Seiji Maehara, the first minister to join a BoJ meeting in nearly a decade, said he'd probably join next week's meeting again. Maehara said today that he hopes to "continue calling on the BoJ to pursue powerful monetary easing to achieve at an early date its 1% inflation target".

Japan's trade deficit widened sharply to JPY 0.98T in September from JPY 0.46T a month ago. The result was the worst on record and was mainly driven by the increase in imports and the huge drop in exports. Geographically, exports to mainland China declined -14.1% due to tensions between China and Japan on the Diaoyu Islands dispute. The economy probably contracted in the third quarter, hurt by deterioration in the exports sector. National CPI dropped -0.1% yoy in September, staying in deflation while Tokyo CPI dropped -0.4% yoy. Though, both are better than expectation of -0.2% yoy and -0.5% yoy respectively. After all, as Japan remains in deflation, the expectation for BoJ to expand monetary stimulus next week in its October 30 meeting is high. There are still much to be done to achieve the 1% inflation target. And if it happens, it will be the second time BoJ expand stimulus in two months.

UK emerged from recession and grew an impressive 1.0% qoq comparing to expectation of 0.6% qoq. The data should have put additional easing from BoE in Q4 off the table and will likely give sterling additional support in near term. However, market will likely remain cautious on sterling on a medium term angle because once the so called Olympic effect unwind, the UK economy may go back to recession again. BoE Governor King said that he's still concerned if whether "some of the recent more positive signs will persist". He noted that "storm clouds coming from the euro area have not yet lifted" and China, India and Brazil are slowing. And he pledged that "should those signs fade, the MPC does stand ready to inject more money into the economy."

The Bank of Canada left its benchmark overnight rate target unchanged at 1% in October. Policymakers retained the view that "some modest withdrawal of monetary policy stimulus will likely be required". The central bank also raised its GDP forecast for this year while maintaining and reducing the outlooks for 2013 and 2014 respectively. The statement gave the Canadian dollar a brief boost. But Canadian dollar was back under selling pressure after BoC Governor's comments as Carney noted that "the case for adjustment of interest rates has become less imminent.

Australian CPI rose more than expected by 1.4% qoq, 2.0% yoy in Q3, comparing to consensus of 1.0% qoq, 1.6% yoy. The RBA trimmed mean CPI rose more than expected to 2.4% yoy and the weighted mean CPI jumped to 2.6% yoy. While the stronger than expected inflation reading isn't enough to change RBA's loosening bias, the data would give the central bank more thoughts before cutting rates again. And that reduced the chance of another cut in November.

At the first meeting in his capacity as the RBNZ governor, Graeme Wheeler left the OCR unchanged at 2.5%. He, however, sounded more upbeat on the economic outlook. He believed that 'market sentiment has improved from earlier in the year, suggesting the risks to the global outlook are more balanced'. New Zealand soared after the meeting.The statement somewhat quashed hope for a rate cut and boosted the Kiwi.