Euro Keeps Creeping, Yen Still Stumbling

The yen sell off is continuing into the new week, breaking above the 89.50 mark. The yen was the worst performer last week while the euro led the way and the new week is starting out with the same theme. Data is light to start the week.

The euro continues to benefit from improved periphery borrowing costs. The drop in Italian and Spanish yields since the summer has been near-miraculous. On Friday, Italian 10-year borrowing costs closed to within a shade of 4.00% and Spanish yields fell below 5%.

The lower yields likely mean the crisis stage in Europe has passed, at least for the next few months. As the market buries concerns about a euro breakup, it will continue to benefit the currency. Eventually, however, the focus will shift to growth.

The pound is a case in point as it struggled to keep pace with the euro last week as worries about the UK economy increased. The NIESR UK forecast for the fourth quarter suggested a 0.3% GDP contraction as the austerity headwinds continue to damage growth.

This week features the BOJ decision and expectations for further easing are high. The proximity to 90 coincides nicely with the timing of the Tuesday decision. A failure at the big level or a break and reversal cannot be ruled out. Expect Japanese corporations to introduce major hedging programs around that level.

The week begins with a light sprinkling of data from Australia. Home loans and ANZ job advertisements will be released at 0030 GMT. Loans are expected to rise 0.5% in the November period but the release is unlikely to move the market.