After very high volatility on Friday, markets attempted a slightly more composed tone on Monday, but there were still very important emerging-market stresses which were never far from the headlines. USD/JPY initially found support below the 102 level in Asia which helped bolster sentiment.
The Japanese trade deficit for December was slightly better than expected with a JPY1.15trn seasonally-adjusted deficit. For 2013 as a whole, however, there was a record deficit of JPY11.5trn as imports continued to rise strongly. There will be further speculation that the weaker trade account will undermine the Japanese currency on a medium-term view. USD/JPY rallied further to the 102.70 area before hitting resistance.
The latest CFTC speculative positioning data recorded a further increase in net dollar longs to the highest level for six months which will make it difficult for the dollar to gain strong support, especially with the latest data registering a switch to small-scale net Euro shorts.
EUR/USD again attempted to break above the 1.3700 resistance area during the European session. Although there was underlying caution ahead of Wednesday’s Federal Reserve meeting with added uncertainty over any impact on the Fed’s decision from the emerging-market stresses, yields edged slightly higher.
The German IFO business confidence was slightly stronger than expected at 110.6 for January and at the highest level since 2011 which failed to provide a major boost to the Euro. In contrast to Friday, the Euro also failed to benefit from support on the Sterling cross as the UK currency regained ground. After another failure to break higher, there was an initial retreat to the 1.3680 region.
The Turkish central bank announced an emergency monetary policy meeting for Tuesday which reversed sharp losses for the Turkish Lira and contributed to a slightly less panicky market conditions with a stabilisation in key emerging currencies. In response, USD/JPY moved towards the 103.0 area.
EUR/USD correlation with emerging markets remained high and the Euro lost support as confidence improved with EUR/USD dipping towards 1.3650. Sterling secured a corrective tone following Friday’s sharp losses and GBP/USD pushed back above 1.6550 with retail shorts still struggling to gain any sustained advantage.