Yen Sold Off After Trade Data

The Japanese yen drops sharply today after release of trade balance data. 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. In a speech at a quarterly meeting, BOJ governor Masaaki Shirakawa warned of the global economic uncertainty ahead and indicated that the central bank would continue with its ultra accommodative monetary policy. According to the governor, "overseas economies have moved somewhat deeper into a deceleration phase. Investors' risk aversion, driven by Europe's debt problems, has eased somewhat but we must carefully watch market developments." Economists currently anticipated that the BOJ would adopt further easing measures by the end of this month.

The euro recovers as the week starts after Spanish Prime Minister Mariano Rajoy's Popular Party won an election victory in his home region of Galicia. The party should have won enough seats in the Galicia parliament to re-elect a second term as president for the region. This is seen by analysts as a sign of support for the austerity measures implemented across the country by Rajoy.

Also, it seen by some as clearing a hurdle for Spain to finally seek international bailout. It's reported that Spain would finally seek a precautionary credit line from ESM in November and then activate ECB's OMT bond buying program. But Rajoy has repeatedly said there is no need for a bailout yet. The uncertainty in Spain's situation would likely cap EUR/USD below 1.32 in the near-term.

Latest CFTC data showed net euro short dropped again to 53.5k contracts on October 16, quite close to 2012 low of 50.2k contracts. Yen net longs dropped slightly to 10.1k but is basically staying in range. since June. Sterling net longs dipped slightly to 19.6k, down from 22.6k a week ago. Aussie net longs were relatively unchanged at 38.4k. Canadian dollar net long dropped slightly to 93.8k, down from 95.6k contracts. But that was before comments from BoC Carney. that started the current selling wave in CAD.