USD/JPY Retreats On Long Liquidation

The greenback dropped sharply against the yen on Tuesday as investors closed their long positions amid speculation that the Bank of Japan will ease its monetary policy in January. The single currency also fell as investors await the European Central Bank meeting on Thursday.

Versus the Japanese yen, although the greenback extended a recent decline to 87.23 in Australia, the pair rebounded to 87.81 in the Asian morning due to comments from Japan Finance Minister Taro Aso before retreating to 87.33. Later, despite the dollar's recovery to 87.59 in New York morning, the sell-off in EUR/JPY (which tumbled from 115.25 to 113.65) sent the pair below said 87.23 to 86.98 at New York midday before staging a recovery to 87.36 on the news that BoJ mulls easing monetary policy again in January and setting 2% inflation target at January 21-22 meeting. However, price met renewed selling there and fell below 86.98 to a low at 86.90.

Japan Finance Minister Taro Aso said "Japan will purchase ESM bonds to help stabilise Europe; wants to issue joint policy statement with BoJ to enhance policy coordination; BoJ should not be solely responsible for employment stability; will compile 2013/14 budget based on previous government mid-term fiscal framework."

The single currency rose initially to 1.3140 in Asian morning and then traded narrowly in European morning. Later, the euro tanked to a low of 1.3057 at New York midday due to active cross selling of the euro versus yen before recovering in the New York afternoon.

In New York morning, the single currency staged a minor recovery due to the comments from a senior French official who said "market rumours of French sovereign downgrade are 'erroneous.'"

Although the British pound rose initially to 1.6129 in Australia, active cross selling of sterling vs euro pressured the pair to 1.6076 in European morning before staging a minor recovery to 1.6108. However, the steep fall in EUR/USD sent the pound sharply lower to a low of 1.6029 in New York morning before staging a recovery.

On the data front, eurozone retail sales in November came in at 0.1% m/m and -2.6% y/y versus forecasts of 0.3% and -2.7% respectively. Eurozone December Business climate and consumer sentiment were released at -1.12 and -26.5 respectively. German November factory orders -1.8% m/m n -1.0% y/y, worse than expectation of -1.4% n -0.3 respectively.

Data to be released on Wednesday:
Australia Retail sales, U.K. BRC shop price index, Trade balance (gbp) , Germany Industrial production, Canada Housing starts.