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Talking Points

• Japanese Yen: Risk aversion wreaks havoc yen strengthens to 103.00
• Euro: Manufacturing PMI in line still expanding
• British Pound: ISM Manufacturing better
• Canadian Dollar: GDP on tap
• US Dollar: ISM Manufacturing expected to slip below 50

As the week opened for trade risk aversion wreaked havoc with equity markets driving the Nikkei down 610 points while USDJPY dropped below the 103.00 figure. The yen was also helped by a much larger than expected rise in Labor Cash earnings which jumped to 1.0% from 0.1% forecast. The rise in LCE was the fastest in 19 months and came as a welcome surprise to the Japanese economy which has been moribund for the past six months as consumer sentiment plunged to some of the lowest readings this decade.

USDJPY traded as low as 102.59 after tripping stops at 103.00. One of the interesting dynamics that has helped yen to break the 105 barrier with relative ease and surpassingly little opposition from Japanese officials is the fact that Japan chairs the G7 this year and therefore cannot act unilaterally to support its export sector by heavy handed intervention in the currency market. This was obvious from lasses-faire tone of comments made by Japanese Fin Min Nukaga today who stated specifically that FX was moving on economic indicators. The pair may find some support during North American trade if the US ISM data surprises to the upside, especially if it prints above the 50 boom/bust level. However if the reading drops below the already expectations a test of 102.00 could be within reach.

Meanwhile, in Europe the Manufacturing PMI from both the EZ and UK was relatively upbeat. The EZ report did however, show the weakest reading in the export component since 2005. While there is still very little reason to believe that the ECB will change its hawkish tone anytime soon, traders will nevertheless focus on every word of Mr. Trichet’s commentary this Thursday to ascertain if he will begin to acknowledge the creeping slowdown in economic activity in the region effectively setting up the market for a change in policy.

On the other hand, UK’s PMI numbers suggested that manufacturing continues to expand and more importantly experience significant price pressures as inputs costs continue to skyrocket. No doubt this news will only solidify BoE’s resolve to keep rates steady at the MPC meeting this Thursday, and as a result the EURGBP cross which has been on a one way trip to the stars lately, traded lower, as fears of further rates cuts from the BoE dissipated.

DailyFX

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