Japan Deflationary Spiral Looms

By IBTimes Staff Reporter | January 29 2010 6:00 AM

Market Brief

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Asian stocks are lower today, weighed by tech stocks and lingering fears about the state of Greece and Portugal’s economic problems. The USD has strengthened on these fears, and also gleaned some support from the reassurance than Federal Reserve Chairman Bernanke was confirmed for a second term – eliminating the uncertainty of an interim period at Fed with only temporary leadership.

Overnight, Japan’s core CPI fell 1.3% YoY in December; smaller than the drop in November – but the narrowest measure of inflation (so-called core-core CPI which strips out the volatile food and energy components) had its biggest drop since records began in 1970. This is likely to put further pressure on policymakers to do more to try and support the economy and prevent another slump ahead of summer elections. The reading may also threaten the credibility of the BoJ who stated in their policy meeting on Tuesday that deflation was likely to be milder than anticipated; and will strengthen their conviction in possible FX intervention should current JPY strength persist. USDJPY has climbed back above 90.00 and is now trading around the highs at 90.25.

GBPUSD is still trading choppily after yesterday’s negative statement from ratings agency S&P; who have stopped classifying the UK among the most stable, low-risk banking systems. So far, GBPUSD has found a near-term base at 1.6111, but with market sentiment increasingly swayed by the prospect of ratings downgrades, we feel that GBP will be vulnerable along with the EUR.

Today, Norway Retail Sales, Eurozone Unemployment and CPI, plus Swiss KoF leading indicators will dominate the focus in the morning session – but the major events for FX markets will come this afternoon. US advance Q4 GDP is expected to show the economy expanded at an annualized rate of 4.6% QoQ, much larger than the 2.2% growth seen in Q3. Chicago PMI is forecast to moderate to 57.4 from last month’s 58.7 reading (though if realized, it would still be a strong number in absolute terms), and U.Mich Consumer Confidence is due to tick slightly higher to 73.0. Also expected will be Canadian GDP.

G10 Advancers and Decliners vs USD

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