JPY Weakens After Japan Posts First Annual Trade Deficit In 31 Years

• JPY weakness spreads across the board after report shows that Japan posted first annual trade deficit in 31 years
• EURCHF trades higher following last night’s positive close as rumours abound of possible intervention by the SNB today
• EURUSD fails to break years high as price stalls again ahead of 1.3050
• GBP slips back from overnight highs ahead of Q4 GDP data at 9.30am
• Gold and Crude largely unchanged in Asian trade as focus shifts to Japanese currency
• European equity markets open with modest gains as risk on helped maintain overall JPY weakness
• USD mixed to lower except versus JPY ahead of US FOMC decision tonight
• World leaders and economic movers and shakers gather in Davos for the 2012 world economic forum

Good morning. Well in my update report I mentioned that the JPY didn’t react to the BOJ interest rate decision, leaving their benchmark on hold for the umpteenth time – how many years has it been at zero?

So long it seems like forever. Well the downgrading of their growth forecast coupled with data that evidenced Japan ran a trade deficit for the first time in 31 years in 2011 has sent the Japanese currency running for cover.

The USDJPY is up a full yen; yes folks a full yen, in other words its moved and that move has been more pronounced versus the GBP and the crosses than versus the USD.

Is this the start of the big yen weakening that many have been looking for, me included? Well, it could just be the straw that tips the apple cart etc and technically the break above 77.55-60, if it can be sustained may prove to be the start.

Now let me refocus on the EURCHF. It moved back off the lows yesterday as rumours abounded that the SNB was going to do something today.

That helped lift the cross back towards 1.2100 overnight and kept the price firm into the European opening. Comments yesterday from SNB board member, Jean-Pierre Danthine, made it abundantly clear that the SNB is very determined to defend the peg with ‘unlimited’ intervention.

Well that perhaps shouldn’t be required, and if it is then it will probably already be too late to work, so I would rather they raise the thing again and catch the market once more.

We know that the move was so effective last time because many were short when they moved and had no choice but to cover. I have already told you how I could get the market short if I were the SNB via the options markets the other week if you remember?

Well the other way would be less subtle and more hands on. That would entail direct intervention to force the price back, say towards 1.23-1.24 and then ramp the peg once they know the markets were short.

That could be assessed by them as they see who exactly is selling to them in the market as they force the price higher. Anyway once again conjecture on my part but let’s see how this one pans out again this morning.

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Cable rose overnight briefly trading into the base of the cloud (which has now fallen to 1.5620) before drifting back into the European opening.

It certainly looks like a good degree of the GBPUSD move has actually been driven by GBPJPY purchases. If you remember I did point out that GBPJPY was ridiculously cheap at 117.50, well its 121.50 now and although not so cheap, on a longer term basis, still not very far away from record lows.

That does mean there is some upside here on this one, particularly if Japan has no need to sell the GBP as its simply not exporting anymore.

However two things to remember here; firstly that Japan won’t be running as trade deficit versus every country so identifying where the weaknesses are would be a sound exercise and secondly the GBP side of the equation may lead to more volatility on this one.

Today is a prime example of that. This morning we have the release of UK GDP Q4 GDP at 9.30am. That is expected to come in at -0.1% growth on the quarter; effectively flat growth, but if we get a number that is really wide of the mark to the downside then sterling could easily get crushed in the short term and that won’t be very helpful to anyone sitting long of GBPJPY.

We have the FOMC interest rate decision at 5.30pm tonight. Now I don’t expect and changes, but there are some out there who expect QE3 from the Fed. I am not one of them as I don’t see the recent economic data as weak enough to force the fed to act again in this regard.

However we will see this evening I guess. Once again the important thing to remember here is that if further yen weakening is going to unfold then its JPY centric as witnessed by the currencies unanimous weakening yesterday.

EURGBP was a tricky customer yesterday. If fell back as the EURUSD fell under 1.3000 again and was forced lower. Clearly there were stops out there on this one just at, or below the key levels on the cloud chart at 0.8323 and 0.8321.

Well, the price fell back to around 0.8312, or rather just enough to ensure that those stops were removed, before it lifted again into the European close.

It’s edging higher again this morning, back into mod range around 0.8350 and the price overall looks highly pivotal to me here. As with the GBP generally it looks like it’s jockeying around ahead of the UK GDP data this morning. I am continuing to stand aside on this one but I will alert you as soon as that changes.

This morning European equity markets have opened with modest gains as the great and the good once again gather in Davos for the 2012 economic forum.

The GBPUSD is slipping back ahead of the UK GDP data as a degree of nervousness ahead of this release forces some limited profit taking in early trade. The EURCHF has made it back over 1.21 and the EURUSD remains near the upper end of its recent range.