Japan Data Disappoints Currencies Mired in Tight Holiday Ranges

Currency markets remained in a lull in Asia with minimal activity seen between the Christmas and New Year period, despite some centres returning from an extended break. The highlight of the session was the early release of a slew of economic data out of Japan which was generally on the disappointing side.

Deflationary pressures were very much in evidence for the Japanese economy with headline national CPI falling a greater than expected 0.5 percent y/y in November, a faster rate than the 0.2 percent recorded in October with core inflation falling at a much faster 1.1 percent y/y. While some of the fall can be accounted for with the dropping out of last year’s tobacco tax, the weak global outlook and under-performing local economy will make it hard work for the Bank of Japan to match its forecast of inflation at, or just above, zero percent through 2013/14.

While headline industrial production for November was disappointing, -2.6 percent m/m and -4 percent y/y compared with consensus -0.8 percent/-2.0 percent respectively, there was some comfort to be gained from the predictions for manufacturing output with December’s forecast revised to a higher 4.8 percent from 2.7 percent and January’s output expected to rise by a further 3.4 percent. Much of this improvement lies in the reinstatement of supply chains following the recent floods in Thailand, a major production base for many major Japanese manufacturers.

Finally, Japan’s jobless rate held steady at 4.5 percent and was bang in line with forecasts. Predictably, the JPY showed scant reaction to the data and, like other currency pairs, drifted in tight ranges throughout the session.

The US again failed to label China as a currency manipulator in its delayed semi-annual currency report, but still considered the moves to appreciate the Yuan to date as insufficient. This will continue to be a hot topic in 2012 as the US/China trade imbalance becomes a favourite subject for political posturing. On currency interventions, the report took a constructive view on the EURCHF peg but said it did not support the recent Japanese intervention moves saying that markets had been orderly during the August and October interventions, in contrast to the post-tsunami G7 moves in March.

Tight ranges were the norm yesterday as a number of centres enjoyed an extended Christmas break. Currency levels were barely changed from pre-Christmas levels and activity remained definitely muted. Oil prices saw a jump higher as Iran threatened to block the Straits of Hormuz if oil-consuming nations embargo exports (note Saudi Arabia assured they will step up output to replace Iran’s) which has given the CAD a slight lift. The EUR’s next testing moment will likely be Italy’s debt auction today and tomorrow.

Yesterday’s US data releases were mixed with the Conference Board’s consumer confidence rising to 64.5 in December from 55.2 (highest reading since April). Manufacturing activity gave mixed signals with the Richmond Fed index rising to +3 from zero (+5 expected) while the Dallas Fed equivalent deteriorated sharply to -3.0 from +3.2. S&P/CaseShiller house price data for October disappointed with falls of 0.62 percent m/m and 3.4 percent y/y though the time lag for the series makes it irrelevant (other housing data has been showing more positive signs for the housing market of late).

For the rest of today, Europe’s data releases are minimal with Sweden’s household lending and retail sales together with Swiss leading indicators the only items scheduled. There is nothing scheduled for North America so these factors should keep activity subdued.