Peripheral yields soared on Friday with the yield on Greece’s 10-year government bond rising to record levels as speculation that of a default continued to gain steam. At the same time yields on the equivalent German note, eased to 3.12 per cent as Bunds were sought as safe havens.

The debate over whether Athens should restructure its debt intensified this week as top euro-zone finance ministers met. There was opposition to restructuring from the European Central Bank, and even Angela Merkel, German chancellor, ruled out any immediate reordering of Greece’s repayments.

European officials have been successful in establishing a firewall around Spain and insulating it from the crisis in the peripheral.  That firewall may be tested shortly.   Spain holds local and regional elections on Sunday ahead of the national election next year.  Socialist Prime Minister Zapatero has already indicated he will not seek re-election.

Spain’s 10-year yield rose 9.1bp to 5.44 per cent. Madrid successfully sold €2.5 billion of the benchmark 10-year notes at an auction on Thursday, and paid a slightly lower premium than at the previous sale of the same bonds on April 20. But the spread over the equivalent German 10-year Bund rose to 236 basis points, the highest seen since January.

The Euro was under pressure and failed to make headway against resistance at the 50-day moving average near 1.4340.  Support on the currency pair is seen next to the weekly lows near 1.4050.  A break of support could see a test of 1.3800.  EUR/GBP failed near the 20-day moving average at .8830.  Support on the cross is seen near the weekly lows at .8680.  The EUR/JPY was also under pressure as the 20-day moving average crossed the 50-day moving average.  Support is seen near 113.75.

Housing Under Pressure

On the economic front, the housing numbers released this past week did not build any confidence.  Both housing starts and existing home sales were worse than expected.

Construction of homes and apartments dropped 10.6% in April to a annual rate of 523,000, compared with a month earlier, according to the Commerce Department. Home starts are down 23.9% from the same month a year ago, reflecting a market that has struggled as foreclosures drive down prices.

Single-family home building declined last month, falling 5.1% to an annual rate of 394,000. Building permits fell 4% to an annual rate of 551,000. Permits for single-family homes dropped 1.8%. Permits for multifamily structures with at least five units declined 13.9%.  Economists predict the housing market is in for a slow recovery.

Existing-home sales decreased 0.8% from a month earlier to a rate of 5.05 million, according to the National Association of Realtors. March’s sales pace was revised downward to a rate of 5.09 million per year.  The results were worse than forecast. Economists surveyed had expected home sales to rise by 2.0% to an annual rate of 5.20 million.

The median sales price was $163,700, down 5.0% from the median price of $172,300 a year earlier. The inventory of previously owned homes listed for sale, meanwhile, climbed at the end of April to 3.87 million.

BOJ Fails to Comment on Yen

The BoJ left the call rate unchanged at 0-0.10%, as expected. Perhaps surprisingly it delivered an unchanged overall assessment of the economy, once again thwarting market expectations that the BoJ will prefer more yen weakness through a move closer to QE, especially after this week’s figures underlined the economy’s fragility and a deepening recession coming into the March disaster. In the statement following the policy decision, BoJ Governor Shirakawa noted that the yen’s rise is negative for the economy in the short term, but also argued that it will bring positive effects longer term. The focus was on the fallout from the earthquake and nuclear crisis, but Shirakawa noted firms are making steady progress in resuming output and supply constraints are easing at a pace consistent with the projection in the BoJ’s semi-annual report. Shirakawa also believes summer power shortages are likely less serious than expected. The yen has firmed from 82.2 to 81.7, with string bids lying all the way down at 81.

Next week the markets will be watching:

• Monday – China HSBC PMI (200 GMT), German PMI (600 GMT), EMU PMI Services (800 GMT)
• Tuesday – German GDP (600 GMT), EMU Industrial Orders (800 GMT), US New Home Sales (1400 GMT)
• Wednesday – UK GDP (830 GMT), US Durable Goods (1230 GMT)
• Thursday – US GDP (1230 GMT), US Jobless Claims (1230 GMT)
• Friday – German CPI, US Personal Income and PCE (1230 GM)

The euro zone periphery remains in the news with Moody’s cutting Ireland 2 notches to the lowest investment grade rating, and maintaining a negative outlook.  This followed Fitch’s removal of Ireland from credit watch yesterday.  Irish sovereign yields had generally been falling since the bank stress tests were announced at the end of March, but Thursday’s possible restructuring talk about Ireland and Greece and Friday’s news have driven up 2-year Irish yields 35 basis points in 2 days, offsetting about 1/3 of the decline.

The ECB has shown that it does not feel that periphery problems are primarily their responsibility, and Friday’s euro zone CPI data provides additional support for their desire to increase rates. CPI year over year increased 2.7%, and the core year over year rose as well, to 1.3% from 1.0% last month.  The ECB path continues to provide support to the euro despite periphery news, with rising rates and a new cycle high today in the spread over 2 year US treasuries, at 113 basis points.

The Ireland downgrade is the latest in a series of downgrades issued by Moody’s and other rating agencies on countries along Europe’s fiscally-weak periphery. Ireland and Greece have both been cut despite being supported since last year by a bailout program from the EU and the IMF. Portugal applied for a similar rescue earlier this month.  Moody’s said the country’s weak economic growth prospects are driven by the fiscal consolidation process, the ongoing contraction in private-sector credit, and a more adverse interest-rate environment now that the ECB has begun raising interest rates.

Standard & Poor’s by contrast, downgraded Ireland to triple-B-plus, which is three notches above junk, from single-A-minus the day after the stress tests, but has the rating on stable outlook, citing the “robust” nature of the tests and the prospect of gradual economic recovery.

The Euro was able to hold next to the high end of the current range which is resistance near 1.45.  A break would lead to a test of target resistance near 1.51.

Prices are Rising too Fast for China

In Asia, Chinese GDP was above forecast at 9.7% year over year down marginally from 9.8% growth in the fourth quarter of 2010. Growth was faster than expected, as economists polled had a median forecast of 9.5%. The consumer-price index, meanwhile, rose by 5.4% from a year earlier in March, up from 4.9% in February and the fastest pace since July 2008. Economists had expected a 5.3% rise.  China’s producer-price index, a measure of wholesale factory prices that can be a leading indicator of inflation pressures, rose 7.3% from a year earlier in March, the data showed, higher than February’s 7.2% rise but below economists’ median forecast of a 7.4% increase.

Economists believe another rise in banks’ reserve requirement ratio could be imminent, which would force banks to hold a higher proportion of deposits in reserve. Earlier this week the central bank raised reserve requirements by 25 basis points.  The central bank has raised the reserve ratio three times this year, and has lifted benchmark lending and deposit rates twice.

Commodity prices surged as inflation remains on investors’ minds.  Gold prices hit a new all time high, and Silver prices hit highs above 42.00.

Is Inflation Rising in the US?

According to the Fed’s recent Beige Book, retailers were less able to pass on costs increases to consumers, despite the noticeable pickup in production costs.  This suggests that producers are more willing to absorb the rising commodity costs and therefore we are unlikely to see a noticeable pickup in core inflation, which is central to Fed policy.  In fact, the recent rise in core inflation has had very little to do with the rise in commodity prices and has in turn driven a noticeable rise in shelter costs, as wage growth remains constrained by the excess supply of labor.

US consumer prices rose 0.5% month over month in March, bringing the 12-month rate to 2.7%, 1/10th of a percent above expectations and the highest rate since Dec’09. The increase was almost entirely led by energy and food prices, which together represent some 23% of the CPI basket. Core prices rose just 0.1% on the month, up just 1.2% on the year. Auto price strength, which transpired in Thursday’s producer price report, was also visible in retail pricing report and the disruption to global auto production from Japan’s disaster will probably support further price strength in the coming months. The key implication for the Fed is that US core consumer price inflation is no longer trending lower – the core CPI rose at a healthy 2.0% annualized rate in Q1, versus 1.2% in the last 12 months.

With US deflation risks subsiding, as reflected in recent healthier employment and core inflation dynamics, the Fed is on course to halt QE in June. Nevertheless, the weakness of vendor pricing power visible across discretionary consumer sectors in March leaves little scope for tightening which will help the Fed to continue to ignore headline commodities price strength.

Headline inflation, which in the eyes of some central banks is out of their realm of control as it is not primarily driven by monetary policy but markets.

Next week the markets will be watching:

• Monday – EMU Consumer Confidence (600 GMT)
• Tuesday – RBA Meeting Minutes (130 GMT), EMU PMI (800 GMT), Canada CPI (1100 GMT), US Housing Starts (1230 GMT)
• Wednesday – German PPI (600 GMT), US Existing Home Sales (1230 GMT)
• Thursday – Australia PPK (130 GMT), UK Retail Sales (830 GMT), US Jobless Claims (1230 GMT)
• Friday – Good Friday

The currency markets experienced a movement away from safe haven currencies during the weak as the Yen declined hitting its lowest level in the past 6 months against the dollar.  The Euro remained range bound between 1.4250 and 1.4000 as issues related to Ireland and Portugal continue to put pressure on European peripheral yields.  During the weak, S&P downgraded Portugal, but the notion that the ECB will increase rates later in the month, has kept the currency strong.

In the aftermath of the tragedy in Japan, riskier assets have bounce considerably, driving investors out of the Yen.  The Japanese currency initially gained as investors believed there would be large capital flows into the Yen as Japanese investors repatriated funds into their currency.  Speculators quickly moved into the Yen, pushing the USD/JPY below 77, only to see a bounce to a six month high near 84.50, in the wake of coordinated intervention.

Sentiment in Japan remains relatively upbeat, allowing investors to remove funds from safe haven currencies such as the Yen.  Japan’s Tankan survey reflected a nation were economic and manufacturing activity was not devastated by the natural disasters.  Bank of Japan’s Tankan index of sentiment at large manufacturers increased last month. First quarter Tankan Large Manufacturers Index showed an level of 6 compared to the 5 expected and 5 prior.

The USD/JPY broke out and tested resistance near 84.50, a break of this level will target resistance at 86.00.  Support is seen for the currency pair at 83.30 and then lower at the 20-day moving average near 82.00.  Additionally, the 10-day moving average has crossed the 50-day moving average generating upward momentum in the currency pair.

European periphery yields continue to remain under pressure in the aftermath of the results of Ireland’s bank stress test and continued uncertainty over Portugal. Increasingly severe capital market conditions bring forward the risk of a technical liquidity default, which will put increased pressure on the EU’s liquidity backstop facilities.

Portugal, unable to negotiate an assistance package with the EU/IMF until a new government is in place, plans to hold a €1.5 billion auction for 2012 bonds. Portugal said Thursday it missed its 2010 budget-deficit goal and has been forced to revise previous-year figures, a blow to market confidence in the country’s fiscal management.

Although Ireland and Portugal are placing pressure on the Euro, Spain and Italy are no longer considered a risk and the Euro zone.  The union is expected to overcome issues with Ireland and Portugal, but in the short term headlines will continue to erode investor confidence.

The Euro continues to climb despite the issues on the periphery as the ECB has made it clear that it plans on raising interest rates.  The central bank meet next week on Thursday and will makes its decision at 1145 GMT.  The risks are that the bank does not raise rates, or makes dovish comments that pertain to future rake hikes.

The US markets were active an traders continued to add to riskier positions in the equity and commodity markets.  Better than expected employment data on Friday, was the impetuous which pushed the markets higher.

US Nonfarm payrolls rose by 216,000 in March as the private-sector added 230,000 jobs, according to the Labor Department. Economists surveyed s had forecast payrolls would rise by 195,000.The February number was revised upward by 2,000 to an increase of 194,000 jobs, from a previous estimated gain of 192,000. The unemployment rate, edged lower to 8.8% last month, the lowest level since March 2009. Analysts had estimated that the rate would remain unchanged at 8.9%.

Private-sector employment, which account for about 70% of the work force, added 230,000 jobs in March. The Department of Labor’s number of private sector was in-line with the ADP employment report on private sector employment released early this week on Wednesday.  The February number was revised upward to show a 240,000 gain. The government sector lost nearly 14,000 jobs in March.

Average hourly earnings of all employees were unchanged at $22.87. Over the past year, earnings have increased by 1.7%. The average workweek for all employees on private payrolls was unchanged at 34.3 hours in March.

Additionally, manufacturing in the US, continues to impress, expressing an economy that is expanding.  The ISM’s manufacturing purchasing managers’ index slipped slightly to 61.2 in March from 61.4 in February.  Economists surveyed expected the March PMI to fall to 61.0.  The expansionary ISM report should ease some worries that the U.S. economy lost steam in March, dragged down by higher energy prices and consumer pessimism. The most alarming index was the prices paid index which rose in March to 85.0 from 82.0.

Crude oil rallied to make new highs on the back of the manufacturing data, and closed near the 107 per barrel level.  The Dow Industrial Average along with the Transport Average made new 2011 highs which is considered a bullish confirmation.

Next week the markets will be watching:

• Monday – EMU PPI (900 GMT)
• Tuesday – RBA Interest Rate Decision (430 GMT), UK PMI Services (830 GMT), EMU Retail Sales (930 GMT)
• Wednesday – Japan Leading Index (500 GMT), EMU GDP (900 GMT)
• Thursday – Australia Employment Change (130 GMT), BOE Interest Rate Decision (1100 GMT), ECB Interest Rate Decision (1145 GMT)
• Friday – UK PPI (830 GMT), Canada Employment Rate (1145 GMT)

Riskier assets gained traction and were able to perform well during the majority of the past week.  Equity markets, along with commodities lead the charge higher and pushed commodity oriented currencies higher as well.  Commodity prices on precious metals also made new all time highs, specifically in Gold and Silver.  The Euro and the Australian dollar tested resistance points and are poised to break to the upside.

Euro

The Euro increased during the week as interest rate differentials trumped continued issues related to Portugal and Spain.  The resignation of Portugal’s government after Parliament rejected the budget, which included further spending cuts.  Although the prime minister retains his post, the EU summit is meeting today with a power vacuum in Portugal.

Portugal’s need for a bailout becomes ever more apparent as it has low reserves and needs to raise 9 billion Euros by June, and 20 billion for the rest of the year.  Some estimates put the required bailout at 70-80 billion euros.  Yields have risen on Portugal’s 2 year and 10 year bonds to the highest level since the creation of the euro.

Moody’s downgraded Spain’s back on the back of the downgrade of the Debt approximately 2 weeks ago.  The European equity markets where able to rally despite the negative news.

The pound moved lower after the minutes from the BOE meeting were released.  Even before the Budget, the minutes of March’s Monetary Policy Committee (MPC) meeting defied market expectations of a slightly more hawkish tone, reinforcing the view that the markets are overpricing the chances of BoE tightening in the coming months. For the majority on the Committee the underlying resilience of the UK economic recovery was far from clear going into the Japan and Middle East shocks and the additional uncertainty since then will serve to balance out deteriorating near-term UK inflation prospects.

Yen

Economic Minister Yosano stated that the damage from the earthquake and tsunami would swell to between 16 and 25 trillion yen. This number, however, does not include the collateral damage due to radioactive contamination and electricity outage. The Japanese government is starting to draw up the supplemental budget based on these estimation.

The yen was weaker this week, reaching its weakest level since the intervention, near 81.40.  February CPI data was near expectations, with the national yoy rate at 0.0%, and department store sales were better than expected.  Data from the Japanese Finance Ministry showed that purchase of foreign assets by domestic investors, including bonds and notes, exceeded sales by JPY291 billion from Mach 13 to 19. In other words, Japanese investors were not, on net, repatriating capital after the earthquake. This supports our view that the sharp price action observed in yen was driven primarily by speculative accounts.

US

During the week, the US saw mixed data.  On Thursday, the Labor Department reported better than expected Jobless Claims.  Jobless claims declined by 5,000 to 382,000 in the week ended March 19, according to the Labor Department showing that the job market is moving in the right direction. The total number of people receiving benefits dropped to the lowest level in almost three years. The number of people continuing to receive jobless benefits dropped by 2,000 in the week ended March 12 to 3.72 million, the fewest since September 2008.

The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs.  Thirty-eight states and territories reported a decline in claims, while 15 reported an increase. These data are reported with a one-week lag. New York saw the biggest drop in claims, almost 17,000, as fewer transportation and services industries fired staff.

In the US, Gross domestic product, the value of all the goods and services produced in an economy, rose at a rate of 3.1% in the fourth quarter according to the Commerce Department.  Economists surveyed had expected GDP to be revised up to a 3.0% growth rate in the government’s third estimate for the final three months of last year. In its previous estimate, the government said GDP rose 2.8%.

U.S. companies’ after-tax profits, which were released for the first time and aren’t adjusted for inflation, fell by 3.3% to $1.369 trillion, following the third quarter’s gain of 2.4%. But the top-line figure rose in the fourth quarter to an annual rate of $1.678 trillion, the highest on record.

Next week the markets will be watching:

• Monday – US Personal Income and Consumption (1230 GMT), US Pending Home Sales (1400 GMT
• Tuesday – German CPI, UK GDP (830 GMT), US Confidence (1400 GMT)
• Wednesday – EMU Consumer Confidence (900 GMT), US ADP Employment (1215 GMT)
• Thursday – Australia Building Permits (0030 GMT), German Unemployment (755 GMT), Japan Tankan (2330 GMT)
• Friday – US Employment Report (1230 GMT), US ISM (1400 GMT)

The past week saw the return of volatility to the capital markets.  Currency’s, equities, commodities and debt all experienced higher than normal trading ranges, with investors moving capital into safe haven assets at the beginning of the week.  All eyes were on Japan, as the nation which was struck by an earthquake and tsunami, was coping with a potential meltdown of numerous nuclear reactors.

The information from the Japanese government was not clear during the week which added to large moves in the currency markets.  The Japanese Yen move almost 5% in a matter of minutes on Wednesday evening at 17:30 GMT.  The VIX which is a measure of equity volatility in the US moved from 20% to 31%, within two trading sessions.  By the end of the week, central banks around the world brought some calm to the markets.

The G7 countries announced a coordinated currency  intervention in an effort to counteract “excess volatility and disorderly markets”.  The Bank of Japan, Bundesbank, BOE and Bank of France have entered currency markets selling yen against the dollar and euro.  The yen weakened as much as 3.5% versus the dollar, reaching the 82 level, and a similar percentage move was seen versus the euro.  This is the first coordinated intervention since September, 2000, then to defend a falling euro, although the BOJ intervened as a solo intervention to weaken the yen last September.

The BOJ is in the midst of dramatic easing of monetary policy through doubling the size of its asset purchases and now agreeing to buy the reconstruction bonds the government will sell, could make this intervention successful.  Additionally, market positioning among speculators may have caught the market leaning the wrong way.  Speculators will be testing the central banks to determine the levels and strength of their pursuit of a weaker yen.

The G7 coordinated intervention has improved appetite for risk and led to the unwinding of some recent safe haven flows.  Equity markets, have moved higher along with commodities, such as petroleum.   In the currency markets, the euro and the Aussie benefitted, while the Swiss franc and yen lost ground.

The UN Security Council approved a resolution to protect civilians in Libya authorizing a no-fly zone and “all necessary measures,” to declare its points. Russia and China abstained from the resolution. The more confrontational stance adopted by Western powers helped drive oil prices about 1% higher, with WTI and Brent futures back to pre-earthquake levels around the $103 and $116 per barrel level, respectively.

Next week the markets will be watching:

• Monday – US Existing Home Sales (1400 GMT)
• Tuesday – UK CPI (930 GMT), Canada Retail Sales (1230 GMT)
• Wednesday – BOE Minutes (930 GMT), US New Home Sales (1400 GMT)
• Thursday – German PMI (830 GMT), EMU PMI (900 GMT), US Durable Goods (1230 GMT)
• Friday – German IFO (900 GMT), US GDP (1230 GMT)

Japan’s foreign minister Maehara resigned over the weekend over a funding scandal and this has negative implication for Japan’s fiscal position.  Maehara had been tipped as a possible successor to Prime Minister Kan, but his resignation appears to weaken Kan’s hand.

In the last week of the year global equity markets remained subdued.  The US markets were down slightly, with the S&P 500 declining .25%.  In Asian, the Shanghai lost nearly 1%, and in Europe the FTSE was the big loser declining nearly 2%.  As the markets look forward into the New Year, the sovereign debt issues in Europe, along with Chinese tightening and US QE should remain on the forefront of investor’s minds.

US Employment Improving

Signs that the employment situation in the US is beginning to improve are coming to light as claims for employment benefits are dropping.

Jobless claims for unemployment benefits fell last week to the lowest level in more than two years. New claims fell 34,000 to a seasonally adjusted 388,000, the lowest since July 2008, according to the Labor Department. The four-week moving average for claims, a measure used to smooth volatility in the weekly data, fell to 414,000 from 426,500. New filings have been hovering below 450,000 a week since the beginning of November.

During the height of the recession, employment claims peaked at 651K in March of 2009, and they have now dipped through the 400K level.  Claims have dropped for a couple of reasons.  First, the employment picture is continuing to improve.  Second, many more people are working in part-time jobs, especially during the holiday season, which is causing claims to drop.  The third is that many people are finding online freelance work, that is now a major part of the global workforce.

For whatever the reason, claims, along with the ISM employment numbers are showing that the US is showing some improvement in the employment sector, which is the final piece to an improving economy.

In Asian, as Japan is rising, China is moderating.

Japan had encouraging economic data with industrial production and retail sales both beating expectations, though inflation remains subdued.  In addition, Japan’s November unemployment rate remains unchanged at 5.1%.  Industrial production increased for the first time in six months, to +1.0% m/m from -0.2% m/m in October, signalling that export-led growth is gaining traction. The pick-up has been in parallel with exports, which show signs of firming after having sputtered for much of this year, after having supported the rebound in production from the Q1 2009 lows into Q1 2010.  Despite the increase in retail sales, Japan’s domestic demand is weak and the country remains dependent on export-led growth.  Overall, Consumer spending will represent a drag on Q4 GDP, having fallen back after expiration of government incentives for purchase of fuel efficient vehicles that had boosted PCE during the previous quarters.  The Yen rallied on the better than expected economic data.

China’s December PMI released by HSBC eased to 54.4, slowing for the first time in five months. Despite the slowdown the reading still remains at expansionary levels (above 50) after it had slipped to 49.4 in July – lowest since Q1 2009. The PMI remains in the middle of this year’s range, after having rebounded to 57.4 in January 2010.  Meanwhile, the December print showed easing in the production and new orders components, while the input cost sub-index moderated to a 3-month low of 72.3 from 80.8, but reflected continued upward price pressure. Japan’s December PMI firmed to 48.3 from 47.3 in November, highest since September, but below the neutral 50 level for a fourth straight month after 14 months above 50. This comes amid signs that the export-dependent Japanese manufacturing sector is regaining traction at year end, after the rebound from the early 2009 trough and the weakness experienced from March to September of this year.  This news continued to boost the value of the Yen.

In Europe, a combination of factors, including strong business confidence and higher than expected CPI boosted the Euro.

German December CPI increased to at 1.7% y/y (HICP 1.6% y/y) but state data suggests acceleration in annual rates.  Inflation in five German states accelerated in December as prices surged in the final month of the year.  Energy and food prices remain the main driving factors so far, but with the labor market improving markedly there is also some risk that underlying inflation pressures will creep higher as labor costs have already started to rise. The higher than expected CPI along with higher US treasury prices pushed the EUR/USD higher.

Italian December business confidence jumped to 103.0 from 101.7 in the previous month, beating consensus estimates of 102. In fact, this is the highest reading since February 2008. The breakdown showed the reading for total orders rising to -18 from -22, mainly on an improvement on domestic orders inflow. Inventories are falling, but the production outlook eased somewhat to 13 from 14. Still, a very strong number overall and important for sentiment since Italy accounts for nearly 17% of euro-zone GDP.  On balance, with robust confidence in other key euro-zone countries this data confirms that the recovery continues (for the time being at least) even though growth trends are slowing down somewhat and are likely to weaken more so in 2011 as austerity measures take effect.  The euro-zone December retail PMI rose to 52.9 from 51.3 in the previous month, suggesting expansion in the retail sector, driven by Germany and France.  The Euro broke out on a daily chart on the back of this better than expected news.

Next week the markets will be watching:

• Monday – EMU PMI (900 GMT), US Construction Spending (1500 GMT), US ISM Manufacturing (1500 GMT)
• Tuesday – EMU CPI (1000 GMT), US Factory Orders (1500 GMT)
• Wednesday – EMU PMI Services (1000 GMT), US ADP Employment (1315 GMT)
• Thursday – UK PMI Services (930 GMT), EMU Retail Sales (1000 GMT)
• Friday – EMU GDP (1000 GMT), US Employment Report (1330 GMT)

Increasing exports boosted Japan’s current account surplus supporting the idea that demand from Asia has helped offset the impact of the yen’s strength.  The surplus expanded 24% from a year earlier to 1.96 trillion yen ($24 billion), more than the forecasts for a surplus of 1.684 trillion yen. Exports climbed 2.3% from the previous month, and 15.9% from a year ago, while imports fell 1.6% from the previous month, and rose 10.5% on the year.

The main development has been Japanese intervention; the first such operation in six years.  Although there has been speculation of the likelihood of intervention over the past couple of weeks, the market was still caught off guard.  The defeat of Ozawa in his leadership challenge, the immediate threat of intervention appeared to slacken and many market observers had pushed back the “expected” intervention until closer to JPY80 and maybe the start of the new fiscal half year on Oct 1.  In this sense, the intervention caught the market wrong-footed.  Which lead to a large move up today, to 85.

The Yen rose today to a 9 month high (JPY/EUR) as signs of global economic recovery faded for currency traders. The Japanese currency rose on account of being sought after as a safe haven. The Yen rose against all 16 of the major currencies, touching 89.25 to the US dollar, with a high of 89.14. it also rose against the Euro to 125.30, the highest level since April 28, 2009.

Contributing to the Yen’s rise were primarily the German consumer prices, which fell this month, suggesting a slowdown in the economic recovery in Europe, alongside the US dollar, which weakened for the second straight day, as concerns of the Fed Reserve keeping interest rates intact near ‘zero’, a decision likely expected by the end of today.

On the Asian side, the North Korean military activity sparked concerns of a possible military dispute in that region, sending traders reaching for their save haven trades.