Key Points
- More JPY volatility likely in the short-term, but USDJPY buying ahead of 115.00 is tentatively favoured.
- FX movement remains a JPY story – USD news has been generally favourable.
- German IFO, Eurozone CPI feature today.

Market Outlook
JPY volatility has continued overnight, with further liquidation pressure causing JPY weakness initially in Asia before a recovery later on in the session. USD-JPY fell as far as 115.61 and the next support is at 115.07 (50% retracement of the Sep- Dec upmove from 108.76 to 121.38). This should hold it in the short-term and risk-reward would favour buying on approaches to this area. However, any break below 115.00 would be a big blow to confidence and would likely trigger further liquidation towards 113.50. Volatility is likely to continue for a while yet and rallies in USD-JPY could run into various bouts of selling by those who missed out initially owing to the speed of the move lower.

Recent movement remains a JPY liquidation story, despite the fact that it has been triggered by a US event (the FOMC announcement). This is reflected in the ongoing weakness in currencies that had previously been the biggest gainers on JPY weakness (i.e. the NZD and AUD). Furthermore, EUR-USD has struggled to push on since Tuesday and while some upside risk will remain in place above 1.1850-1.1900 the data flow from the US leaves a big risk of a resumption of USD strength. The market is in danger of calling an end to pro-cyclical arguments a little too early.

Day Ahead
Eurozone – German IFO data for December is due and is likely to confirm the improved growth backdrop in Germany. While the headline IFO index fell back in November, this was only after a very sharp rise in October and it remains close to the highest levels seen since the beginning of 2001. Eurozone CPI data is also due, although something unusual on the core measures will be required to introduce some excitement into ECB policy expectations.

US – Q3 balance of payments data is released today and while the current account deficit will probably grab most of the headlines, the market will also be looking for evidence about Homeland Investment flows. Such activity would tend to show up by reducing the outflow of reinvested earnings in the FDI category. In Q1, reinvested earnings were about $20bn lower than would ordinarily be the case, while in Q2 they were around $15bn lower than normal. There should have been an acceleration in these flows in Q3, but the bulk of them are likely to appear in the Q4 data. The usual caveats apply about whether such repatriation necessarily represents pure USD flow. If the funds were previously invested in US assets like TBonds or if the FX holdings had been hedged, in each case there would be a corresponding outflow elsewhere in the balance of payments e.g. on portfolio account if Treasuries have been sold.

Diary
Data/event BST Consensus*
CH Ind prod (Q3) q/q 08.15 7.6% last
DE IFO index (Dec) 09.00 98.2
DE IFO current (Dec) 09.00 98.1
DE IFO expectations (Dec) 09.00 98.1
EU CPI (Nov) y/y 10.00 2.4%
EU CPI ex-energy/fresh food (Nov) y/y 10.00 1.4%
US Current account (Q3) 13.30 -$205bn
* Consensus unless stated