[Jason_Lim]

USDJPY tested 88.10 this morning, but this move has not been covered by yield differentials or by a shift in the US yield curve. USDJPY chart support intervenes at 87.90 from where expect a limited bounce. The USDJPY – US bond yield correlation has collapsed, but USDJPY has started reacting to US economic releases. USDJPY’s sensitivity to US data releases has exceeded the sensitivity of EURUSD. This is new to the market and applies especially in the case of weak US data such as last Friday’s US labour market report. Today, US consumer credit will be released. Credit has fallen since March suggesting that QE has not opened the credit channel. The consensus expects consumer credit to fall by USD10bln after USD21. bln in July, but should the number come in weaker USDJPY will be hit. A weekly closing price below 87.90 targets 86.80 ahead of 85.00.

The risk of a Latvian devaluation has increased after the Latvian government introduced measures to protect indebted local households and corporates from the side effects of currency devaluation namely the valuation rise of non-local currency denominated debt. The government has proposed to limit the amount a lender can collect from mortgage holders to the valuation of the underlying asset. Hence, debt value and asset value will be linked according to the government’s proposal. Swedish banks have dominated the Latvian markets and must now take most of the losses. Tomorrow, Sweden will release its industrial production data for August where the market expects a rebound to 0.9%. Swedish data are notoriously volatile and even a strong reading would not change strong belief that NOKSEK will rally sharply. The increasing risk of a Latvian currency devaluation will keep the SEK offered. On the other hand, Norgesbank might be the first European CB to increase rates when it meets on 28 October. Today’s release of August industrial production has come in on the strong side. The early Australian rate hike seen yesterday has increased the markets sensitivity to betting on rate divergences within an environment where liquidity is still ample as shown by the strong equity market rally.

This equity market rally has been prolonged in Asia with banks and commodity related shares in demand. Market expects risky assets to remain strong up to the end of this year as institutional investors start window dressing their portfolios. Meanwhile, the UK has released consumer confidence hitting a 17mths high which will stabilise sterling in the short-term.