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Currency markets are exposed to knee-jerk volatility in thin holiday-week liquidity conditions with a close to empty European and US economic calendar leaving traders without a tangible near-term catalyst for price action.

Key Overnight Developments

• Japan’s Industrial Production Rises on Car Exports, Domestic Demand Weak
• UK House Prices Rose For Fifth Month on Falling Supply, Says Hometrack

Critical Levels



The Euro consolidated in a narrow 40-pip range below 1.44 while the British Pound yielded an effectively flat result after recovering from an initial -0.2% drop at the start of Asian trading just ahead of the opening bell in Europe. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights



Preliminary estimates showed that Japan’s Industrial Production grew 2.6% from the previous month in November, a reading slightly higher than economists expected and the largest increase since May. Output declined -3.9% from a year before, the smallest drop in 14 months. Transport equipment led the metric higher, up 1.1% from the previous month with a 0.78% gain in passenger car, bus and truck production at the forefront. Autos are Japan’s primary export and today’s outcome likely owes to a rebound in overseas demand driven by ample global fiscal and monetary stimulus efforts. Indeed, exports gained 4.9% from the previous month in November, the most in over 13 years, with metrics tracking vehicle shipments to Asia and the US turning positive for the first time in at least six months.

Meanwhile, Japanese domestic demand remained lackluster as Labor Cash Earnings fell -2.8% from the previous year in November, the third consecutive month of deteriorating wages and the biggest drop since June, weighing on spending. Retail Trade shrank at an annual pace of -1.0%, marking the first time that the metric has not improved since February, while a gauge of large retailers’ sales dropped -9.6% to register the largest decline in nearly 12 years. It remains to be seen whether a sustainable rebound in overseas sales will encourage firms to re-hire workers and boost incomes, but for the time being Japanese companies seem content to do more with less. Indeed, labor market data released last week showed that the number of employed people declined at the fastest annual rate in four months in November.

In the UK, the Hometrack Housing Survey showed that property prices will probably decline at the slowest pace in 19 months in December, falling -1.9%. On a monthly basis, prices probably rise 0.1%, marking the fifth consecutive period of growth. The details of the report were far less encouraging then the headline figure, however, hinting that shallow supply rather than recovering demand were behind the rebound in home values. Indeed, the number of newly listed properties declined -0.8% while the number of new buyers fell -2.2%.


Euro Session: What to Expect



The European economic calendar is empty and only minimal event risk is scheduled for release as US markets open late into the session with December’s edition of the Dallas Fed’s gauge of manufacturing activity set to cross the wires. This leaves the currency markets wanting of a tangible catalyst for price action, opening the door for plenty of knee-jerk volatility in thin holiday-week liquidity conditions. We will continue to hold our long-term positions but would certainly lean against taking on any new exposure in this environment.