Yen short positions increase

Last week’s CBOT report revealed that speculative accounts continued to build yen short positions. In the reporting week to 24 October, yen shorts rose from 115k to 138k contracts. USD/JPY came under downside pressure as US Q3 GDP provided increased by only 1.6% vs. 2.6% in Q2, the smallest increase since Q1 2003, when GDP grew by 1.2%. Final sales declined from 2.1% to 1.7%. Though consumer spending accelerated from 2.6% to 3.1% (as expected), expectations were met thanks largely to the deceleration in the PCE index.

Japanese industrial production declined 0.7% m/m in September, slightly better than market expectations for a 0.9% decline. The data did not affect the JPY significantly given that it is US data of more importance now. Odds for a rate cut by the Fed in H1 of 2007 have increased significantly while the US yield curve has steepened modestly, BNP Paribas reports in a commentary. Given USD/JPY’s break of uptrendline support on Friday, analysts expect to see further losses in the pair. The next key level for USD/JPY is 117.40 which the currency pair is testing. A break of this will open for losses to 116.40. The focus for the USD this week will come from the ISM manufacturing survey and the employment report at the end of the week.

 

EUR/USD faces key resistance at 1.2760, followed by 1.2780 ahead of 1.2860, the major resistance line for this week. The Michigan sentiment index rebounded unexpectedly in October but the USD failed to gain from this Friday. This week’s focus will be on the ISM manufacturing survey and US employment report. The market will probably not want to be too heavily long USDs ahead of these releases given the stream of negative data recently. In contrast, the market is turning more positive on the eurozone growth outlook for 2007 with talk that growth will hold irrespective of the VAT hike.

 

EUR/CHF downside has been limited even as government and central bank officials try to talk the CHF higher. Last week, FinMin Merz said that Switzerland should “look after” the CHF trading range and hopes the CHF will not drop further. Over the weekend, SNB’s Hildebrand was quoted in the Swiss newspaper SonntagsZeitung that developments in the CHF have been a “conundrum”. Hildebrand noted that fundamental data for the CHF are good and that monetary policy normalisation is continuing. Hildebrand also wanred of the risks of carry trades. He said “our responsibility is to remind everyone that we have a flexible currency regime and that the currency risk remains. Recent CFTC data point to another fresh net short positions on the CHF and

JPY. High beta markets have not yet shown any signs of rolling over and as long as markets are in a risk seeing environment they would look for funding opportunities. Nonetheless, it would be likewise careless to ignore recent comments from Swiss officials like Merz, Roth and Hildebrand seeing the CHF undervalued.

 

Cable retains its upside bias, approaching key trendline resistance that currently intervenes at 1.9020. The CBI’s latest industrial expectations survey disappointed, but a strong housing market and inflation concerns are keeping a BoE November rate hike in play. Hometrack said that national house prices rose 0.4% m/m in October with the y/y rate accelerating to 4.9%, its fastest pace of growth since August 2004. In fact, the Rightmove October survey showed similar developments in house prices. While national house price growth is coming primarily from the London market, the data supports the view that the BoE will hike in November. On Friday, UK think-tank NIESR called for a 50bp BoE rate hike in order to bring inflation back to the 2% target. BoE economist, Bean, also said last week that “it is better to err on the side of caution.’