Yen Trades Best Ahead of Holiday - Will Oil's Impact Start to Wane

Overnight Wire

• Oil hits $117 in Asia as Gustav lumbers towards Gulf of Mexico
• FT story : Russia could curtail oil as response to criticism of Georgia campaign
• Equities up modestly ahead of North America open
• Japan announces stimulus package of $10 Trillion yen
• Japanese eco data all better than forecast
• Japanese IP 0.9% vs. -0.3% eyed
• Japanese unemployment 4.0% vs. 4.1% eyed
• Japanese Retail Trade 1.9% vs. 1.3% forecast
• UK GFT Consumer confidence bounces off 6 year low of -39 to print at -36
• EZ CPI cooler at 3.8% vs. 4.0% forecast, sentiment survey in line with dour expectations
• ECB Bini Smaghi: Inflation still too high
• Swiss KOF hits 5 year low of .68 vs,.83 projected
• US Personal Income/Personal Spending on tap
• Canada see GDP data
• USD/JPY Below 109.00 as better data and anti-dollar flows help
• GBP/USD Cable can't rise above 1.8300 as speculation rises that BOE will cut in September
• EUR/USD consolidates at 1.4730 awaiting US data as oil prices whip the par in thin trade

On a night when currencies spent most of the Asian and European sessions meandering aimlesslyin thin pre-holiday trade yen showed consistent strength buoyed by better than expected economic data and an announcement by the government of Japanese Prime Minister Yasuo Fukuda of $10 Trillion yen stimulus package

The stimulus measures were modest in scope with only $2 trillion earmarked for actual spending while the rest was simply capital allocated for credit guarantees. Most analysts discounted the economic merits of the plan noting that it offered little in the way of stimulating consumer spending. Nevertheless it added to the positive backdrop of economic data which included better than forecast unemployment numbers and Industrial Production results.

With EZ economy in the midst of a clear slowdown that will necessitate an eventual cut in rates, the yen may become the stronger anti-dollar currency than the euro as the year progresses.After spending most this decade as the whipping boy to the carry trade and rising only when bouts of risk aversion hit the market, the yen may finally start to change this dynamic as global rates begin to compress and the carry loses its luster. Indeed, perhaps the strongest indication of this new dynamic is the fall in EURJPY through the critical 160.00 handleovernightwiththe two currencies following distinctly opposite paths as the final trading session of the week wore on.

Meanwhile EURUSD continues to be dominated primarily by the vagaries of the oil market, rallying sharply when crude hit $120/bbl in yesterday's frenzied trade and falling just as hard when oil dropped to $116/bbl. Still, the drama of Gustav and the machinations of the Russians should soon be over and currency markets are likely to refocus on the micro economic factors as we enter the last quarter of 2009. To that end the key question that remains unanswered is just how resilient is the US consumer?

Yesterday's GDP data was deceptively positive as the vast majority of the upside surprise was due to much better growth in exports. Ex-exports the US economy saw very little internal growth rising only 0.2% from the year prior. Therefore today's personal income and spending figures could prove pivotal in either supporting or refuting the dollar bull's case that US economy is recovering from its credit-crunch fueled slowdown. We continueto be highly skeptical that the US consumer will hold up given the massive destruction of wealth in the housing sector and the sluggish demand in the labor markets, but if today data prints to the upside EURUSD may dip below 1.4700 once again

FX Upcoming

Boris Schlossberg
http://www.gftforex.com

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