Yen Continues to Weaken but Consumer Prices are Making Gains

Japan continues to make progress in deflation fight. While the BOJ is pumping liquidity into the market; the stock market is rising generating a wealth effect that seems to have finally paid off. If prices at the core level can continue to rise, export growth could gain traction and drag the economy out of its 30 year slump.

Japan’s core consumer price index, which excludes energy and fresh food, rose 0.3% on year in October, the first gain for five years and the biggest increase since 1998. Unemployment held steady at 4% in October, while manufacturing PMI rose to 55.1 in November from 54.2 last month. However, October industrial production improved just 0.5% on month and badly missed expectations, while the growth in overall household spending slowed.

In European news, Euro zone unemployment unexpectedly fell to 12.1% from 12.2% in September, while euro zone preliminary consumer prices accelerated to 0.9% year over year from 0.7% in September. Analysts had expected Euro zone CPI to remain unchanged at 0.7% last month. The ECB meets next week, and the data will likely give the bank leeway to wait until 2014 to change policy.

German retail sales were weak, falling 0.8% month over month in October instead of rising 0.5%, as expected. This reflects a cautious consumer which could allow the ECB to ease rates in the coming months. September was revised to -0.2% from -0.4% originally. French consumer spending was also weak, falling 0.2% month over month after a 0.1% drop in September, while PPI contracted 1.4% year over year in October.

The Yen continued to fall against the greenback on Friday after breaking out above trend line resistance near 101.50. The next level of target resistance is seen near 103.75. Support is at former resistance as well as the 10-day moving average near 101.20. Momentum on the currency pair is robust with the MACD printing in positive territory. The RSI is flashing a warning sign by printing at 74 which is above the overbought trigger level of 70.