Shockingly bad economic data out of Japan led to great volatility in yen crosses during today’s Asian session, while the dollar also gave up some ground as it struggles to maintain its positive momentum due to excessive positioning.
3rd quarter GDP data out of Japan missed expectations by a huge margin; coming in at a contraction of 0.4% against expectations of an expansion of 0.5%. Therefore, given the sharp contraction of the second quarter (-1.9% quarter-on-quarter downwardly revised), Japan has dipped into recession again.
The news sparked renewed speculation that the sales tax hike was going to be delayed. The speculation pushed dollar / yen to 117.06 – a new 7-year high and euro / yen all the way up to 146.52. The two pairs subsequently backed down to around 115.75 and 145.05 as a near-3% drop in the Nikkei led to safe haven flows that favored yen. Profit-taking also had something to do with the pullback.
In signs that the US dollar could struggle to extend gains due to excessive speculative positioning, the euro was trading around 1.2525 and the pound was trying to regain the 1.57 level. It appears that some in the market used the opportunity provided by positive US data on Friday to take profits on the greenback.
Looking ahead for the remainder of the day, Eurozone trade balance for September will be looked at closely, especially to see the effect of the euro’s weakness. Later during the US session, industrial production and capacity utilization data for October will be interesting, in order to see how the US manufacturing sector is doing.