Yen Mildly Firmer after US Criticize Intervention, Italian Auctions Watched

Yen strengthens mildly today after US Treasury criticized Japan's intervention in a report to Congress. The US Treasury noted that it supported the G7 coordinated intervention to stabilize yen after devastating natural disaster back in March. However, it explicitly said that it didn't support the invention from August through November. The reported noted that the intervention operated at a time "foreign exchange market activity and risk aversion were being predominantly influenced by financial developments elsewhere in the global economy that were impacting all of the major currencies". And, yen's volatility was lower than EUR/USD while exchange markets functioned normally. Also, the report noted that yen's "real value" is "near its 15 year historical average." Hence, the US Treasury concluded that intervention was not required and urged Japan to take " fundamental and thoroughgoing steps to increase the dynamism of the domestic economy, increase the competitiveness of Japanese firms -- including those in utilities and services -- and raise potential growth".

Risk sentiment was also somewhat weighed down by weak data from Japan. Household spending dropped -3.2% yoy in November versus expectation of -1.2%. Retail sales dropped -2.3% yoy in November versus expectation of 0%. Industrial production dropped -2.6% mom in November versus expectation of -0.8% mom. National CPI dropped -0.2% yoy in November while unemployment rate was unchanged at 4.5%.

Italy's bond auction will be the major focus today. Italian Treasury is set to sell EUR 9b of 179 day bills and EUR 2.5b of zero-coupon 2013 bonds. Italy will also sell as much as EUR 8.5b of 2014, 2018, 2021 and 2022 bonds tomorrow. The auctions will be carefully watched considering that 10 year yield is still struggling around 7% level, which spurred Greece, Ireland and Portugal to seek bailout. Recent positive developments, including the EU summit, Italy's new austerity package, seemed to be unable to hold yields below the unsustainable 7% level yet.