The eco and events calendar remains fairly light today with the European Commission’s consumer confidence and French and Belgian business confidence releases. In US, the Richmond Fed manufacturing index will be published. Spain (T-Bills) and the US (2Yr Notes) will tap the market.
The European Commission’s consumer confidence is expected to show a stabilization at -25.9 in October, the lowest level since May 2009. Consumer sentiment is expected to remain poor due to record high unemployment rates and severe austerity measures weighing on household budgets. We believe that a further decline is likely after strikes and protests in several Southern European countries. The French and Belgian business indicators have a more than usual interest as they precede the publication of the PMI’s this month. For both, the headline index is expected to have stabilized in October. We hope to see some improvement which would underpin our expectation that the EMU manufacturing PMI has also improved, which would be for the third time. In the US, the Richmond Fed manufacturing index has made already a significant rebound over the previous months, from -17 in July to 4 in September, but is expected to stay broadly unchanged in October. A marginal increase from 4 to is forecast. We believe that the risks, if there are any, might be on the downside of expectations as all evidence suggests that the US manufacturing sector continues to struggle. Earlier released regional US business confidence indicators showed a mixed picture too.
This morning in Asian trading, markets were thin with light volume. The big movers have the JPY after the government began to bully the Bank of Japan to introduce addition stimulus at their next meeting. The Japanese trade balance unexpectedly widened in a report released yesterday, which supports additional easing. The EUR/USD is trading flat at 1.3054 and the GBP/USD is also flat at 1.6013
Yesterday the USD/JPY extended the rebound that started last week. The move was still driven by market speculation that the BoJ will ease policy further at the October 30 meeting. The pair tested the 79.66 resistance yesterday morning and cleared this barrier later in the session. During the day, US bond yields reversed the decline from Friday. This might have been slightly supportive for USD/JPY, too. Nevertheless, let’s assume that domestic factors (BOJ) were the key driver for USD/JPY trading. The pair reached a correction top at 80.01 overnight. Traders are still a bit surprised that the market is prepositioning in such a pronounced way for BOJ easing (in the past the reaction to any BOJ action was often limited and temporary). That said, the momentum in the USD/JPY cross rate is clearly positive and there is no reason the row against the tide at this stage. The June top (80.62) is the next high profile point of reference on the technical charts. Exporters need the JPY above the all important 80 level to make profits; below will have significant negative effects on the economy. The BoJ stimulus would help weaken the JPY.