FOREX-Yen buoyed by risk reversal, euro on defensive

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The Japanese yen climbed across the board on Monday as a grim global outlook favoured safe-haven currencies, while the euro stayed on the defensive on talk of an aggressive cut in eurozone interest rates later this week.

Investors in Asia were still reacting to Friday's dismal U.S. payrolls report which showed 1.1 million jobs lost since November and the highest unemployment rate since 1993 [nTOPMACRO].

That was just part of a torrent of woeful economic data from around the globe that put paid to any optimism the new year would bring increased risk appetite and rising equities.

As a result speculators were forced to unwind long positions in the euro and commodity currencies which had been funded largely by borrowing in the yen. Indeed, dealers reported aggressive selling of euro for yen on Friday with one Japanese institution dumping particularly large amounts from 125.00 all the way down to 121.26, a loss of 3 percent on the day. Early Monday, the euro was licking its wounds at 121.16 yen , far from last week's peak around 128.55, though trade was thin with Japan on holiday.

The rush back into the safe-haven yen had knocked the U.S. dollar down to 89.96 yen by Monday morning, from 90.34 in New York and a high last week of around 94.63.

Yet the euro suffered even more, shedding over 2 percent against the U.S. dollar on Friday to end at $1.3424. Early Monday, it had edged up only a little to $1.3470 with investors now looking ahead to the European Central Bank's policy meeting on Thursday. And speculation is rife the central bank will cut its key lending rate by 50 basis points to 2 percent after alarming falls in industrial output right across the euro zone reported last week [ID:nL9311168].

That was a marked turnaround in sentiment as the ECB had seemed to be talking down the chance of any easing in January. Instead, analysts suspected it would have no choice but to cut, and to cut aggressively in coming months.

"With the fourth quarter shaping up to be the weakest on record for growth in the Eurozone and a progressively deteriorating outlook for both industrialised and emerging economies, we now expect the ECB to deliver more stimulus than we did a month ago," Royal Bank of Canada assistant chief economist Dawn Desjardins wrote in a note to clients.

RBC is tipping no less than 150 basis points of easing from the ECB, while it also sees the Bank of England cutting by another 100 basis points to just 0.5 percent.

In this they would be playing catch-up with the Federal Reserve which is already near zero and cannot cut any further, though it is boosting the money supply by buying private assets on its balance sheet.

That means nominal interest-rate spreads are set to narrow in favour of the dollar.

Economic news from the U.S. this week includes the November trade account, retail sales and producer and consumer prices for December and a couple of regional industry surveys for January .

Also of interest on Friday will be Treasury data on capital flows in and out of the United States since the country needs to borrow a vast amount of money this year and any hint of waning offshore demand for U.S. debt could undermine the dollar.

So much for updates :D.