Tuesday’s Surprises from Australia and Japan

BBH CurrencyView

• The dollar is mixed against the majors and EMs but largely remains confined to recent ranges
• The EuroStoxx 600 slid for a second straight day, currently down 0.5%; MSCI Asia index holds recent highs
• Demand in Greek bill sale eased slightly and refinancing costs moved higher; Portugal’s 10-year up 22bp

The dollar is currently mixed against the majors and EMs as the lack of progress on Greek debt talks is again sapping momentum from the market. The euro is trading lower 1.3122, up marginally from the low of 1.308 seen during the European session. We still see support near 1.300, with resistance near 1.32. Sterling made an attempt at higher levels on UK clearer demand, but fell short of 1.5840, with sterling currently trading at 1.581. Sterling resistance is seen in the $1.5880-$1.5900 area. Meanwhile, the Australian dollar is consolidating after marking six-month highs of 1.0823 following the RBA’s surprise move to keep rates on hold at 4.25%. The yen is down 0.25% against the dollar after the MoF revealed it carried out Q4 intervention. Resistance is seen near 76.90 and a break of it could see a quick move to 77.40.

Nothing new today out of Greece as talks are set to continue this week. While Greece does not have to meet the big debt maturity until March 20, procedural and legal issues suggest the nation has until mid-February to reach agreement. As such, real deadline is looming despite the fact that deadlines have not meant a lot in recent weeks. In the near-term, the Greek premier is scheduled to meet today with the three leaders of the ruling government regarding the implementation of additional fiscal measures needed to secure the second EU/IMF bailout. On the data front, German December was much weaker than expected. Weaker data comes just as German unions are undergoing annual wage negotiations. After some years of weak wage settlements due to the crisis, it appears that German workers are set to boost demands for higher wages this time around. Elsewhere, SNB’s Jordan engaged in some jawboning about maintaining the 1.20 floor for EUR/CHF, but contained nothing really new. We are a bit surprised that markets have yet to test SNB resolve here.

The yen is among one of the weakest performers against the dollar today driven in part on the announcement from the MoF that it recently engaged in stealth interventions. In particular, the details of the MoF quarterly foreign exchange report showed that policy makers spent nearly ¥9 trillion intervening on October 31 followed by marginal increases afterwards, totaling roughly ¥1 trillion in the early days of November. Altogether, the MoF revealed that it conducted five such “stealth” operations in an attempt to weaken the yen against the dollar. We suspect that the tactical attempts at stealth intervention do not represent a new strategy by policy makers to attempt to weaken the yen. Rather, the focus of policy makers is likely to provide a short-term subsidy for exporters who have been negatively impacted by the yen’s broad strength. Indeed, we continue to believe that intervention is more likely as the USD/JPY moves closer to the record low near 75.35. Yet, the usual triggers, including disorderly or extreme one-sided market, do not seem present. Looking ahead, this evening we get the December trade report, which is expected to show that Japan’s import still exceed exports (albeit the deficit is expected o shrink from November). Japan’s investment income is seen to come in near ¥1,100bln due to Japan’s net external asset, which is offsetting the trade deficit and keeping the current account in surplus.

The RBA surprised markets by keeping its policy rate on hold at 4.25%. The consensus forecast was for a 25bps. Still, the policy statement was dovish with policy makers leaving themselves plenty of room if “demand conditions weaken materially” from, presumably, an external shock, suggesting that any further easing in policy would likely require an external shock. In that case, a non-threatening inflation outlook gives them leeway to ease policy. Furthermore, the Bank expects growth to be close to trend and inflation close to target, making the current rate "appropriate for the moment." The next key level of resistance is the July 2011 high of 1.108, while near-term support rests at 1.0675.

As expected, exports contracted in Taiwan for the first time since late 2009, falling by 16.8% y/y in January. Imports, however, contracted by less than expected falling by 11.9% y/y. On net, the trade balance came in almost flat from a $2.3bn surplus in December. This is, of course, a bad sign for regional economic growth, but it has been largely priced in our view. We think the central bank will start easing at its March meeting with a 12.5 bp rate cut to try and help boost the economy. TWD has been in the middle of the pack YTD in emerging Asia, and should continue to hold up OK given signs of soft landing in mainland China. USD/TWD is testing the 200-day MA around 29.53, a clean break of which sets up a test of the September low around 28.91, but this will depend largely on external developments.