Asian Market Update by Trade The News Staff

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EUR/USD falls below 1.30 as USD is seen consolidating for now

- Australia's November building permits rose m/m by 4.0% v 2.0% expected, the first rise in building permits since September. The strong building permits release was coupled with AiG's constructing index expanding for the first time since September. Some analysts believe that Australia's strong job market is partially responsible for the recovery in the Australian property market. With respect to the job market, December ANZ job advertisements rose at the fastest pace since June of 2003 (up 12.1% v -3.8% prior). Following the release of building permits the AUD/USD pair rose off of session lows and is currently in positive territory.

- The PboC's governor Zhou said over the weekend that China may allow the Yuan to be more flexible if its trade surplus continues to expand. After many weeks where analysts said that yen short positions are stretched, the yen is seen benefiting from expectations that the Chinese may make the yuan more flexible.

- Goldman Sachs cut its price target for crude oil in 2007 for the 2nd time in the past two weeks. Goldman now sees crude oil at $69 from a prior forecast of $72.50. Some analysts are expecting oil prices to be supported in the near term by recent work to US refineries, geopolitical tensions with Iran and additional threats from OPEC to cut production.

- Equities: With the Nikkei closed due to the observance of a holiday, Asian equities are mostly selling off as “hot money” exits Asian stocks and commodities plays ahead of the Bank of Japan's next rate decision. The South Korean KOSPI is currently down by almost 1.0%, as technology shares are under pressure following a recent profit warning from Motorola. The KOSPI is currently at a 9week low. Taiwanese equities are down by more than 0.90% after the government took control of a local bank following liquidity concerns. The Hang Seng opened down by 1.5% as recent monetary tightening in China caused financials to sell-off. Australia's ASX index declined for the 4th consecutive session as Shanghai copper opened limit down and declined for the 4th time in as many sessions. The Thai Set index opened sharply lower on geopolitical concerns.

- Forex: The NZD/JPY and AUD/JPY are currently holding near session lows on weak commodities prices and the unwinding of carry trades. Although the yen gained sharply during the session, the Swiss franc only made modest gains as many analysts expect the increase in forex volatility to lead to unwinding of carry trades. The Korean Won is trading near session lows against the JPY and near 7- week lows against the dollar, following last week's decision by the Korean government to stimulate investment overseas in order to slow the appreciation of the Won and help exporters. The Taiwan Dollar is down sharply against the USD on concerns in Taiwan's banking sector. The CAD traded mixed, despite a recovery in oil and gold prices. The USD is expected by other to remain stronger on expectations that the Fed's Kohn will not allude to an imminent rate cut.

- Gold prices are currently slightly higher and holding above the $610 level on bargain hunting following last week's sell-off.

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Asian Market Update: BoJ governor Fukui disappoints yen bulls by saying that Japan can keep "very low" rates for a while

- Bank of Japan governor Fukui did not hint directly at an imminent rate hike after he said that the Bank of Japan can keep “very low” rates for a while. Following Fukui's comments the JPY fell to session lows across the board. The USD/JPY pair rose to a 13- month high ahead of tomorrow's US retail sales data. In Japanese economic releases, December bank lending rose more than expected (Bank Lending YoY: 1.7% v 1.3%e) and at the fastest pace since 1993. Japanese banks traded higher after the release.

- New Zealand's November building permits fell for the second consecutive month (NOV BUILDING PERMITS: -12.0% V -3.6% PRIOR (Revised); Ex apts down 4.8%) causing the NZD/USD to fall below $0.6900. However, the Kiwi has since rebounded on dovish commentary from the BoJ's Fukui and on rate differentials.

- The Wall Street reported, citing a senior OPEC official, that the cartel may be consider holding an emergency meeting or asking non-OPEC producers to cut output in order to stabilize prices. Following this development, crude oil rose more than 1% to above the $52.50 level.

- Forex: The AUD traded lower across the board on lower gold prices. AUD/JPY traded sharply off of its lows following words from the BoJ's Fukui. The CAD gained across the board and is holding near session highs as oil prices gained. Emerging currencies are weak across the board, tracking the losses on yen.

- Equities: The Nikkei 225 rose more than 1.4%, led by gains in technology shares. Asian tech shares largely ignored a profit warning from AMD. The broader Topix also gained more than 1.70%. Several analysts pointing out that there's a high correlation between the drop in the yen and the rise in Japanese shares over the last few sessions. The KOSPI gained more than 1.5% led by better than expected profit results from Samsung. Australia's ASX 200 index rose above the 5600 level, driven by gains in miner BHP. The Hang Seng is trading higher by more than 1%, despite the index being cut by HSBC and Morgan Stanley over the past week. China's B shares are higher by more than 7% on speculation that B shares will be merged with A shares. Chinese B shares are adding on to last session's 10%+ gains.

- Spot gold is down by more than $2 despite the rebound in crude oil prices. Shanghai Copper is lower, tracking the LME contract.

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Asian Market Update: Traders increase bets on a BoJ rate hike after strong machinery orders data

- Ahead of this week's Bank of Japan policy meeting, November Japanese machinery orders rose for a 2nd consecutive month and by a better than expected 3.8% m/m v 3.4%e. The yen gained strength on the release as traders increased bets of a BoJ rate hike this week, but gave up some gains as domestic consumption in Japan continues to be weak. There was talk out of Japan that the Japanese government may seek to prevent a January rate hike. Most analysts still believe that a BoJ rate rise this week would not erode the huge yield advantage of other major currencies, and the yen is likely to remain under pressure.

- Australia's November new homes loans fell for the 4th consecutive month, showing that the Reserve Bank of Australia's rate hikes are starting to affect the property market. However, inflation worries persist as the TD Securities December inflation index rose to 0.3% v 0.2% prior.

- The South Korean government introduced measures to aid exporters and slow the further appreciation of the Won. This release was expected by the market and did not affect Korean Won trading.

- Forex: The USD started the Asian session on a strong footing, but reversed on profit taking in thin trading ahead of tomorrow's US holiday. The CAD is trading higher on rising oil prices. The Chinese Yuan was set at a new post revaluation high against the USD and the Hong Kong dollar tracked the trading of the Yuan.

- Equities: The Nikkei 225 rose for the 2nd consecutive session as better than expected machinery orders drove gains in Sony and Nissan. Japan Air also rose sharply on reports that it was entering a loan pact with various Japanese banks. The ASX 200 index rose for the 4th consecutive session, led by miner BHP and takeover speculation fueling the shares of Alinta. South Korean exporters had initially gained on stronger than expected US retail sales. The Hang Seng is higher for the second consecutive session and by more than 1%, led by financial and telecom shares. Taiwan's Taiex opened sharply higher, but the stronger Taiwan dollar and declines in financial shares are currently weighing on the index.

- Bonds: Japanese bond prices fell to near 2.5 month lows on stronger than expected machinery orders and gains in equities. Overnight index swaps in Japan are implying about a 75% probability of a 25 basis point rate hike in Jan policy meeting, compared to a 65% probability priced in before the release of machinery orders.

- Commodities: Crude oil is higher and above the $53 level, despite indecision out of OPEC with respect to an emergency meeting to discuss further production cuts. Tokyo gold is currently higher by more than 1.5% on demand from funds. Shanghai copper is little changed as China reported that 2006 copper concentrate imports fell 11% y/y.

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Asian Market Update: Japanese tech stocks gain on expectations of strong earnings growth

- Japan December corporate goods price index came in at 0.0% m/m v 0.0%e, rising at the slowest pace in one yr. A Japanese newspaper reported that the Japanese government will not seek to delay a January Bank of Japan rate hike because dissension between the government and central bank is seen as unwise. This report was later denied by Japan's Economics Minister Ota, who believes that an early rate hike will hurt the Japanese economy as consumption remains weak. Traders are now awaiting Japan's release of final industrial production for November to confirm the strength of Japan's corporate sector.

- Lower oil prices and a softer Kiwi during 4Q06 helped New Zealand Q4 business confidence to climb to a 4-yr high (Q4 Business Confidence: +3 v -19 prior). The release led to the NZD/USD pair rising to session highs near the $0.6970 level. The Kiwi saw some profit taking towards the afternoon session in Asia.

- The PBoC set the Chinese Yuan at a new post revaluation high against the USD for the 2nd consecutive session and for the 3rd session out of the last 4. The Yuan is currently worth more than the Hong Kong dollar (USD/CNY= 7.7887 v USD/HKD= 7.7985).

- Forex: The AUD is tracking oil and gold prices lower. AUD/JPY and MZD/JPY both traded in negative territory ahead of this week's Bank of Japan policy meeting. With US markets closed for a holiday, foreign exchange trading was quiet. Some currency pairs seeing a bit of a correction from the trends we had late last week, perhaps showing that some of those trends got a little overextended. The Korean Won is stronger against the USD and JPY, despite the Korean government implementing measures to slow the Won's gains. The GBP is softer against the USD as RICS December House Price Index rose less than expected (DEC RICS HOUSE PRICE BALANCE: 37% V 45%E) and at the slowest pace in 4-months.

- Equities: The Nikkei 225 rose marginally in cautious trading led by gains in tech stocks and exporters, which are benefiting from a weaker yen. The broader and financially weighted Topix is at a 8-month high, as a Bank of Japan rate hike is seen as beneficial to Japanese banks. Shares of Sony traded lower by close to 0.50% after Nomura Research lowered it PS3 sales target for the company. The ASX 200 is trading near record levels, buoyed by gains in shares of retailer David Jones following it raising its profit outlook. South Korea's KOSPI is little changed as traders are showing caution ahead of earnings from LG Philips.

- Bonds: Japanese bond prices ended the morning session in negative territory following gains in equities and on uncertainty with respect to the Bank of Japan's next policy move. JGB yields dropped at the start of the afternoon after a 5yr auction that some strong demand.

- Commodities: Crude oil is lower and holding below $52.50. Tokyo Gold is near 6-month highs on fund demand. Shanghai copper is lower on demand concerns.

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Asian Market Update: Bank of Japan now faces a test of its credibility

- Japan's November current account surplus widened less than expected (NOV CURRENT ACCOUNT TOTAL: ¥1.76T V ¥1.93TE; ADJUSTED: ¥1.95T V ¥2.18TE), but this release did not affect JPY trading as traders remained focused on this week's BoJ meeting. Traders significantly reduced bets on a BoJ rate hike after various media reports. Overnight index swaps are now implying a 30%-40% chance of a January BoJ rate hike v 80% priced in during the prior session. The BoJ now faces a test of its credibility - if the BoJ delays a rate increase it will give the appearance of bowing to government pressure.

- New Zealand's Q4 CPI came in softer than expected (-0.2% q/q v -0.1%e) causing the NZD/USD pair to briefly fall below the $0.6900 level. However, the Kiwi has since rebounded as CPI ex fuel actually rose by 0.6%. Kiwi also gained on yen weakness and expectations that the BoJ will remain on hold. NZD/JPY and AUD/JPY remain near session highs.

- Forex: The USD/JPY pair rose to a 13-month high. Yen traders are now awaiting the release of December consumer confidence and December final machine tool orders data, but reaction is likely to be muted ahead of the BoJ meeting. The AUD was strong on gains in oil prices and rate differentials. The Taiwan dollar and Korean Won are sharply lower against the USD, tracking JPY weakness. The Chinese Yuan was set at a new post revaluation high for the 3rd consecutive session and the fourth session out of the last five. Despite the stronger Yuan, the Hong Kong dollar remained near session lows against the USD. The Thai Baht is in negative territory against the USD ahead of today's rate decision in which the market is expecting the Bank of Thailand to cut rates to 4.75% from 5.00%

- Equities: The Nikkei 225 is down by more than 0.40% as technology shares are declining following Intel's quarterly report. Financial shares are also lower on dwindling prospects for a January BoJ rate hike. China's Shanghai benchmark stock index rose to a new all-time. The Kospi is lower by more than 1.3% led by declines in Samsung SDI and LG Philips following their earnings reports. The ASX 200 is once again being weighed down by mining shares. Taiwan's Taiex is slightly positive as gains in airline stocks are outweighing declines in technology shares.

- Bonds: Japanese bond prices rose on lowered expectations for a January Bank of Japan rate hike.

- Commodities: Following a precipitous drop during the US session following comments out of Saudi Arabia, crude oil is rebounding in Asian trading and is approaching the $51.50 level. Spot gold is lower by more than $1 and below $625 on technical selling. Following last session's daily limit decline, Shanghai copper is declining on supply concerns. Shanghai copper is currently near a 9-month low.

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Asian Market Update: Bank of Japan leave rates unchanged to assess more data

- After coming under pressure from the Japanese government to support the Japanese economy through their monetary policy, the BoJ kept rates unchanged in order to assess more data. The BOJ voted by 6-3 in favor of keeping policy unchanged. The news was leaked by a Japanese newswire an hour and a half before the official announcement, and the biggest yen losses were associated with the leaked report. After the official announcement, Japanese bond yields spiked on expectations that the Japanese economy will grow quicker with lower rates. There was a rather muted reaction among carry trade pairs following the announcement. The BOJ's monthly report on the economy will be released at 1:00 ET and a press conference by BoJ Governor Fukui will start at 1:30 ET. More yen reaction is expected at the Fukui press conference, as traders will look at his comments to assess future monetary action.

- Equities: Ahead of the Bank of Japan rate decision, the Nikkei 225 gained by more than 50 points, driven by gains in healthcare shares. Following the BoJ rate decision the Nikkei is higher by more than 0.50%. The South Korean Kospi and Taiwan's Taiex rose as technology shares were driven higher following better than expected earnings form Apple. The ASX 200 index is higher as a rebound in commodities prices drove gains in mining shares. The Hang Seng is currently little changed, despite declines in property related shares.

- The USD was softer on profit taking after stronger than expected US economic data, as traders grew cautious over upcoming housing data. USD/HKD moved to the highest level since 1991, as traders bet that the HKD will not be allowed to gain more as the CNY gains against the USD. US treasuries moved up in Asia ahead of Fed chairman Bernanke's testimony and CPI data.

- Commodities: Spot gold rose for most of the Asian session on the softer USD ahead of tomorrow's housing and CPI data. Crude oil is higher ahead of upcoming crude inventory data and is currently above $52.50. Some traders believe that the colder US Northeast weather is also responsible for the rise in crude prices. Shanghai Copper is currently little changed, with speculation that bargain hunting Chinese manufacturers may buy the metal supporting copper prices.

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Asian Market Update: Yen continues to soften as traders ignore a close vote to leave rates on hold

- New Zealand's November retail sales fell by 0.2% m/m v -0.1%e, as a decline in car sales dragged the headline number down. The soft retail data caused the Kiwi to decline across the board, but losses were limited as rate differentials continue to support the currency. The prior New Zealand retail sales was revised lower to -0.1% from 0.1% prior.

- The Fed's Bies said that the slowdown in the US housing market appears not to have spilled over to other sectors. She said that inflation appears poised to decelerate in coming months as energy prices stabilize and resource pressures ease, but she added a decline in the inflation rate is not assured.

- Australia's Q4 import and export price indices both came in softer than expected (Q4 EXPORT PRICE INDEX QOQ: 0.2% V 1.0%E; IMPORT PRICE: -3.2% V -1.7%E). Following this release the AUD/USD pair fell to sessions lows after failing to break the $0.7900 level, but has since rebounded.

- Forex: The JPY is weaker across the board as the BoJ rate decision continues to dominate foreign exchange markets. The Japanese Ministry of Finance has repeatedly said that the BoJ made the correct decision to leave rates on hold, and the yen is expected to be on the back foot until the middle of February when the release of Japanese GDP for the December quarter is due. The CAD is weaker across the board and near session lows on sharp declines in crude prices. The Korean Won is weaker against the USD after the Bank of Korea threatened intervention. With little European data for today to provide direction, and with the EUR/USD breaking minor resistance at 1.2988, the Euro is expected to remain firm as traders continue to expect further tightening from the ECB.

- Equities: Most Asian equities are in negative territory, tracking sharp declines in the Nasdaq index as funds rotate out of technology shares and traders reduce expectations of a Fed rate cut in the near term. The Nikkei is lower by more than 0.50%, as losses on tech stocks are being counterbalanced by gains in Tokyo property shares. The ASX 200 is down by about 0.50% on declines in energy and resource stocks.

- Bonds: Japanese bond prices continued to rally as interest rate risks have declined, despite the BoJ vote being close at 6-3 to leave rates on hold.

- Commodities: Crude oil is continuing to decline in Asian trading following bearish inventory data and Saudi Arabia downplaying the possibility of an emergency meeting. Spot Gold is slightly higher tracking the weak USD.

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