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  • BoJ Kuroda says Yen is not excessively weak or in a bubble
  • German IFO Business Climate beats expectations – helps EUR find some bids to north of 1.35 against the USD
  • Canadian data fails to give traders direction – mixed data set unable to help Loonie claw back its overnight weakness

Economic weakness across the globe and the potential for sustained monetary stimulus helped North American equities post some considerable gains during yesterday’s session.   Governor Kuroda from the Bank of Japan reassured market participants the liquidity spigot had room to be opened further, while a softer than expected Philly Fed reduced the prospects for a trimming of asset purchases from the FOMC in December; the combination of the two left investors optimistic central banks would continue to fuel the markets’ liquidity addiction, pushing the S&P up 0.81% while the Dow closed above 16,000 for the first time ever.

The commodity-bloc currencies were left in the dust despite the positive performance from equities and the energy complex, with Loonie bears continuing to gain momentum after Bank of Canada Governor Poloz reiterated his neutral stance on interest rates, telegraphing the first movement up in rates would most likely not come until at least 2015; USDCAD vaulted into the low 1.05s, but met strong resistance as corporate offers sopped up demand for USD.

The overnight session in Asia was fairly quiet, although BoJ Governor Kuroda was back on his soap-box attempting to jawbone the JPY lower stating that he is not of the opinion the yen is at abnormally low levels and the currency isn’t displaying bubble-like properties.   This is likely not the last we’ve heard from Japanese policy makers on monetary policy or the exchange rate of its domestic unit, as they have made it quite clear they are committed to doing what is required to bring the economy out of its deflationary slump.

USDJPY is little changed from yesterday heading into the North American open, seemingly well situated above the 101 handle on the prospect of further action from the BoJ.   The Nikkei rallied earlier in the session after the strong performance on Wall Street, but the optimism faded by the close with the regional index ending the day essentially unchanged.

Focusing on Europe, the major equities are mixed midway through their session, with the FTSE in negative territory while the Dax and the Stoxx dip their toes into the green.   Following on the heels of a better than expected ZEW survey from earlier in the week, the German IFO Business Climate for November came in stronger than expected, printing at 109.3 vs. the 107.7 analysts had forecast and the previous reading of 107.4.

Businesses in Germany were optimistic across the board, with the diffusion sub-indices of current conditions and future expectations both picking up from last month and beating the median analyst expectation.   The enthusiastic IFO report has investors comfortable increasing exposure to the EUR this morning, pushing EURUSD back above 1.3500 at the time of writing.   While the confidence displayed in Germany during the month of November is a positive, the underlying issue continues to be the periphery nations of the common-currency bloc, and so far, a mediocre recovery in Germany has been unable to buoy the remainder of the zone.

Heading into the North American open, the economic data releases were primarily focused North of the 49th  parallel.   The weakness in the CAD from yesterday’s session continued overnight, with the commodity-currency smack-down propelling USDCAD to test the highs from late August/early September before the releases of Retail Sales and CPI.   The economic data points would best be categorized as a mixed bag, containing elements that both Loonie bulls and bears could take away from the data set.   Headline retail sales for the month of September came in stronger than expected, registering a 1.0% increase from August and beating the median analyst forecast.   When stripping out the more volatile automobile number, the core measure showed sales remained flat from last month, slightly disappointing considering economists had expected to see a modest 0.2% gain.   On the inflation side of things, the headline CPI basket came in cooler than expected when compared to the previous twelve months, increasing by only 0.7% which is down from the 1.0% that was registered in September.

This is concerning for the Bank of Canada considering the recent attention that has been given to persistently low inflation, however the sluggish number was mostly attributable to lower gasoline prices. Stripping out the more volatile items of the CPI basket showed the core reading remaining flat at 1.2% on a y/o/y basis, which if the softness in gasoline prices is transitory, should give Poloz and the BoC a more optimistic picture than the headline print initially reads.   The mixed prints have left Loonie traders stymied for the time being, and after an initial knee-jerk lower in USDCAD, the pair is back to pivoting in the mid-1.05s where it was before the releases.

North American equities look content to continue where they left off yesterday, albeit with a little less momentum as stock futures are only moderately positive before the opening bell.   Energy is stabilizing somewhat this morning, although front-month Brent continues to attract bids on the back of escalating political tensions between the US and Iran; the international heavy oil benchmark is up 0.43% this morning, changing hands in the north of $110.5/barrel.

Looking ahead to next week, the economic calendar is fairly light, but things do start to pick up as we get closer to December.   There are a few readings on the housing market in the US hitting the wires next week, and after the FOMC minutes from the October meeting relayed the Committee saw a slowing in the housing recovery, these indicators will be key to watch as their impact will no doubt factor into the FOMC’s decision making process on when the right time to taper will be.

While the housing market won’t carry as much weight as the jobs number for November due in a few weeks, the strength of the housing market is still important and could potentially determine whether the Committee decides to forego slowing MBS purchases in lieu of Treasuries when they do finally decide to ease off the QE accelerator.   Pending Home Sales are due out  on Monday  of next week, followed up by Building Permits and Housing Starts  on Tuesday.

Further reading:  The yen trend