USD/JPY Hangs Tough

Stock market worries continued for a third day but the bond market and yen traders continue to brush them aside. The Australian dollar was the surprise best performer while JPY lagged. In Asia, economic data is light.

Traders came into the day on edge after the meltdown in stock markets on Friday and early signs pointed to a rebound in sentiment. The optimism quickly faded in stock markets; futures pointed to a 10 point gain in stocks but that quickly turned to a 15 point loss.

The turnaround in sentiment was a recipe for another breakdown in yen crosses but the declines never materialized. Instead, USD/JPY tracked down to 102.21 and then rebounded to close higher on the day. The bond market shared the same opinion with 10-year yields closing the day 4 basis points higher.

The stability in bonds and yen crosses suggests the worries in the financial press are overstated. The real question is what the Fed will do later in the week. Officials could maintain course with another $10 billion taper, scale down QE by $5 billion or add dovish guidance to the statement.

In the meantime, price action and economic news dominates. The main release on Monday was new home sales for December and it was a disappointment with sales at a 414K pace compared to 455K expected. French jobless was also weaker than forecast.

In the end, those data points had little effect on the dollar or euro. The main mover was the Canadian dollar as a rebound in USD/CAD was halted at 1.1030 and then the pair climbed to 1.1115, underscoring the problems for the loonie.

Up later, Japan releases the Dec corporate services price index and small business confidence for January. Both data points have a low market impact. Something else to watch is a speech from New Zealand PM Key ahead of Thursday razor-thin RBNZ decision on whether to hike now or wait until March.