The Japanese yen, and to a lesser extent dollar, jump sharply higher today as global stock markets are weighed down by fear of contagion effect from Spain's banking problems. Major European indices are down over -3% in the middle of the day before recovering mildly, following -3.0% fall in Nikkei. Libor on for three-month loans in dollars jumps for the 11th day to a 0.536% and is set to double the 0.3% level in early May when Europe's sovereign-debt crisis began to balloon. Crude oil drops further to 67.31 so far while gold is steady around 1190 level. Dollar index is now pressing this month's high of 87.46. US equities are set to open sharply lower and should provide additional support to yen and dollar.

Strength in the Japanese yen is apparent in the markets. EUR/JPY break through recent low of 109.46 and reaches as low as 109.32 so far. AUD/JPY dives to as low as 72.04 and is set to take on last week's low of 71.86. NZD/JPY drops through last week's low and reaches as low as 58.64 so far. CAD/JPY also breaks through last week's low to as low as 82.83. CAD/JPY is set to take out 82.23 to resume the whole down trend from 94.46. Also this will be an important signal of medium term reversal and will take CAD/JPY further lower to 78.52 support for confirmation. We'll stay bearish in CAD/JPY as long as 85.86 resistance holds.

Markets are deeply concerned that problems in Spanish banking system would lead to wider spread credit crisis in the Eurozone. The takeover of CajaSur by Bank of Spain could be the first of several before mid-year. Spain's auction of three and six month bills jumped to 0.645% and 1.264% as compared with 0.515% and 0.736% last month. four Spanish savings banks plan to merge to for the nation's fifth largest group. Caja de Ahorros del Mediterraneo, Grupo Cajastur, Caja de Ahorros de Santander y Cantabria and Caja de Ahorros y Monte de Piedad de Extremadura submitted a proposal to Spain's central bank to combine their businesses. Finance Minister Elena Salgado said yesterday that more savings banks would merge in coming weeks. IMF warned that consolidations in Spain's banking industry is too low and Bank of Spain should be prepared to intervene promptly if pockets of weakness remain.

BoE policy maker Posen said UK and US economies are at low risk of turning Japanese in the sense of having recurrent recessions through macroeconomic policy mistakes. However Posen emphasized that UK and US are sharing some risks and problems in common with Japan in 1995 and deflation cannot be ruled out. Meanwhile Posen also pointed out that one major problem which Japan did not face during its Great Recession was poor prospects for external demand and the need to reallocate productive resources across export sectors.

On the data front, UK Q1 GDP was unrevised at 0.3% qoq, -0.2% yoy in Q1. Index of services rose 0.2% 3M/3M. Eurozone industrial orders rose more than expected by 5.2% mom, 19.8% yoy in March. Swiss UBS consumption indicator rose to 1.76 in April.

Intraday bias in dollar index remains cautiously on the upside for the moment. Break of 87.46 high will confirm resumption of recent up trend and should target 2009 high of 89.62. Nevertheless, a break below 86.49 minor support will indicate that consolidation from 87.46 is still in progress with another fall to below 85.14. But downside should be contained by 38.2% retracement of 80.04 to 87.46 at 84.62 and bring up trend resumption finally.

EUR/JPY Mid-Day Outlook

Daily Pivots: (S1) 110.81; (P) 112.09; (R1) 112.97;

EUR/JPY's break of 109.48 confirms that recent down trend has resumed. Intraday bias remains on the downside and further decline should be seen to 61.8% projection of 169.96 to 112.10 from 139.21 at 103.45 next. On the upside, break of 114.39 minor resistance will argue that a short term bottom is formed with bullish convergence condition in 4 hours MACD and RSI. In such case, stronger rebound should be seen, possibly towards 122.27 resistance.

In the bigger picture, fall from 139.21 is treated as resumption of long term down trend from 2007 high of 169.96 and should target 61.8% projection of 169.96 to 112.10 from 139.21 at 103.45 which is close to 100 psychological level. Though, we'd expect strong support between 2000 low of 88.96 and 100 psychological level to contain downside and bring reversal. On the upside, break of 127.88 resistance is needed to be the first signal of bottoming. Otherwise, outlook will remain bearish.

Economic Indicators Update

GMT Ccy Events Actual Consensus Previous Revised 3:00 NZD RBNZ 2-Year Inflation Expectation Q2 2.80% -- 2.70% 6:00 CHF UBS Consumption Indicator Apr 1.76 -- 1.71 1.68 8:30 GBP GDP Q/Q Q1 P 0.30% 0.30% 0.20% 8:30 GBP GDP Y/Y Q1 P -0.20% -0.20% -0.30% 8:30 GBP Index of Services 3M/3M Mar 0.20% 0.20% 0.40% 9:00 EUR Eurozone Industrial New Orders M/M Mar 5.20% 2.50% 1.50% 1.90% 9:00 EUR Eurozone Industrial New Orders Y/Y Mar 19.80% 15.00% 12.20% 12.50% 13:00 USD S&P/Case-Shiller Composite-20 Y/Y Mar 2.40% 0.60% 14:00 USD Consumer Confidence May 59 57.9 14:00 USD House Price Index M/M Mar 0.00% -0.20%