Yen Steady After GDP Miss, Markets Consolidate

Markets are rather quiet as the week starts. Japan's GDP grew only 0.3% qoq in 2Q12, well below expectations of 0.6% qoq and 1.2% qoq in the first quarter. The major disappointment came from weak consumer spending. Although the government has been giving subsidies on a number of green products since the earthquake last year, the impact on stimulating spending has been limited.

As the positive effect of the subsidies fades, Japan's consumption outlook is expected to weaken further in coming quarters, an outlook that would hurt investors' confidence. Nikkei is nearly flat at the time of writing while the Japanese yen is stuck in range against other major currencies.

Talking about GDP, growth data from the eurozone will be a major focus this week. The eurozone economy probably contracted -0.2% qoq in 2Q12. Although the 17-nation region avoided a technical recession after a flat GDP reading in the previous quarter, the economic developments have been dismal. Several peripheral countries have indeed slipped into recession and the situation will only be worse as the government implement fiscal consolidation plans.

Germany, the economic leader in eurozone, has likely lost steam, too, and could expand by a mere 0.1% qoq. The country's economy ministry warned last week that trades have declined and business sentiment in recent months has dropped sharply and pointed to "significant risks" to Germany's outlook.

Finland's prime Minister Katainen maintained his opposition to ECB's plan to buy Spanish and Italian bonds. Indeed, Katainen criticized that "the European Central Bank purchased sovereign bonds on the secondary market, and it only helped temporarily." And Katainen urged leaders to find other means and ways there are "efficient and sustainable." Also, Kaintainen continued to oppose to giving ESM a banking license as that would eventually "raising the burdens so high that the help wouldn't be credible anymore."

Latest CFTC data showed speculators continued to pare bet against the euro as euro net shorts dropped modestly from -139k contracts to 131.7k contracts as of August 7. On the other hand, bets on the Japanese receded as net longs dropped from 32.2k to 27.5k. Speculators were nearly neutral on sterling, with net shorts slightly up from 1.8k to 8.2k.

Meanwhile, net longs on aussie continued to rise to 52.9k, up from 37.2k. Net longs on Canadian dollar also rose to 19.1k, up from 12.4k. Overall development was inline with recent surge in risk appetite. But again, as noted in our weekly report, we'd prefer not to join any risk rally this week as S&P 500 is close to 2012 high while AUD/USD is also close to an important trendline resistance.