Yen still King in Risk Aversion

A second day of risk aversion led to another yen rally after disappointing UK & US economic data. The kiwi narrowly outperformed the yen on a reach for yield and a better dairy auction while sterling continues to lag. Early in Asia-Pacific trading the euro busted through stops to a fresh cycle low. Among the several trading options in yen crosses, we selected a new pair in today's edition of the Premium Insights. After realizing a total of 260 pips in last week's CADJPY shorts, we raise the question as to whether to keep on shorting CADJPY or to move into another pair, which has more downside potential. The 2 trades and 3 relevant charts are in today's Premium Insights.

Sentiment was relatively stable heading into US trading but the lack of any kind of bounce after the rout on Monday should have been a warning sign. When the ISM non-manufacturing index was reported at 56.2 compared to 58.0 the yen began to rally and it didn't stop until late in the day.

USD/JPY skidded all the way to 118.06 while GBP/JPY took a beating for the third day, falling more than 300 pips at the lows and breaking the 61.8% retracement of the rally since October.

Along with the ISM data, factory orders were disappointing. We especially highlight a revision to the Nov core durable goods orders reading to -0.5% from 0.0%. That marks 5 consecutive months of lower or flat orders – something that hardly fits with the widely-believed narrative of a strengthening US recovery.

It's clear some skepticism is setting in and the bond market remains unconvinced. US 10-year yields fell as low as 1.88% and closed at the lows level since 2012. Five year breakevens now imply just 1.07% over that period. Oil is clearly part of the story with prices down another $2 on Tuesday but that's a one-year effect.

In all the focus on JPY and GBP, the euro quietly rallied to 1.1959 in late London trading but a few hours later it slipped back toward the European low of 1.1884. In early Asia-Pacific trading, that level broke and sparked a flurry of selling down to 1.1843, taking out Monday's spike low then bouncing to 1.1870.There is very little support for the euro technically and more chatter about ECB sovereign QE continues to circulate.

Looking ahead, Asia-Pacific trading will remain delicate but there are no important data releases on the calendar.