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Forex: Japanese Yen Crosses Line Up for Breakout Ahead of BoJ Decision

By , Chief Currency Strategist
05 September 2013 01:23 GMT

Talking Points:

  • Dollar Stumbles as US Stocks Surge, Taper Countdown Continues
  • Japanese Yen Crosses Line Up for Breakout Ahead of BoJ Decision
  • Australian Dollar’s Data-Driven Rally May Run Out of Steam Without Risk Trends

Dollar Stumbles as US Stocks Surge, Taper Countdown Continues

A global equities rally rounded out by the biggest advance for the US Indexes in two weeks generated enough friction to send the dollar reeling Wednesday. While the greenback has found itself unable to leverage much strength out of risk aversion gusts over the past weeks, the liquidity purveyor nevertheless remains exposed to swells in risk appetite that move capital towards higher yield and in some cases depressed (Australian dollar, emerging market debt, etc) assets. Looking across the majors, there are more than a few pairings dangerously poised for a more prolific anti-dollar move. A more convincing climb in traditional capital market benchmarks (like the S&P 500) and carry interest could secure a near-term break against the greenback – even if the follow through would struggle. Event risk over the next 48 hours is significant and should be considered more trend defining. The G20 meeting doesn’t have a black-and-white outcome but Friday’s NFPs do.

Japanese Yen Crosses Line Up for Breakout Ahead of BoJ Decision

The Japanese yen crosses were up across the board (equating to a yen decline) Wednesday in a trend that has developed through the week. With the most recent bout of gains, however, we are starting to come into overhead technical resistance. This is a particularly well-timed point of contention given the event risk that we face this morning in Tokyo trade: the Bank of Japan (BoJ) rate decision. The central bank’s threats and ultimate actions to leverage an unprecedented stimulus program to end deflation – and, it is argued, to lower the yen – forced a structural shift for USDJPY and its counterparts. Yet, despite the clout this event holds, it is unlikely to deliver the satisfaction those trading momentum need to clear to the next stage of advance. While we will look for comments pertaining to the central bank’s willingness to escalate should Prime Minister Abe proceed with the tax hike, we are unlikely to see change today. Policy may not provide, but risk trends may fulfill our needs

British Pound Looks for Further Action from BoE Governor Carney

The July and August Bank of England (BoE) policy gatherings have been particularly interesting for sterling traders. With the new Governor, Mark Carney, we have seen the introduction of forward guidance (rates untouched until 2016), been given clear targets for policy (7.0 percent jobless rate) and the reemergence of dissent for the future moves. Against the backdrop of quick upturn in the UK economic readings, it is easy to understand why the market is on edge with the upcoming decision due at 11:00 GMT. Yet, given the significant steps made recently, the probability of further substantial change is low. Pound traders should watch to see whether Carney will make a habit of post-meet commentary.

Australian Dollar’s Data-Driven Rally May Run Out of Steam Without Risk TrendsIn the past three active trading sessions, the Australian dollar has surged. From the start of the week, AUDJPY is now up 4.5 percent, AUDUSD 3.0 percent and even AUDNZD is 0.7 percent in the green. This incredible run for the high-yield currency has been sourced from the Australian docket itself rather than external sources. That said, the major catalysts have passed. In the wake of the shift in tone following the RBA rate decision, the better-than-expected 2Q GDP reading and trade numbers amongst other releases; the Aussie dollar has covered a lot of ground. With pairs like AUDUSD facing down significant resistance on the back of winded short-term momentum, the threat of correction is high. An outside push is what the currency needs. A swell in the appetite for higher risk positions is needed to backup the improved yield outlook.

Euro Traders Have Low Expectations for ECB, Try to Ignore Local Rumblings

The European Central Bank (ECB) will deliberate monetary policy in the upcoming trading session and is set to deliver the consensus at 11:45 GMT. What matters to traders is whether there will be any deviation from the current line of expectations, and that is a particularly low probability. However, there is room for nuance – which market participants have proven adept at ferreting out if the response to recent RBA and Fed policy events is any gauge. As such, the 12:30 GMTpress conference with ECB President Mario Draghi will hold greater market-moving potential. Yet, there isn’t much scope for change as the economic and financial situation in the region remains stable. In fact, there are a number of issues starting to develop in the backdrop, but the complacency is remains particularly strong with this currency and region. At the top of the list is the impending (next Monday) debate in Italy about whether to ouster Silvio Berlusconi and the implications that has for the coalition.

Emerging Markets: Will India’s New Central Bank Governor Curb Help the Rupee?

The MSCI Emerging Market equity ETF advanced for a fifth consecutive day Wednesday with the biggest jump in a month for the day. The FX performance for the ‘developing’ groupwas one of the most consistently encouraging seen in a while. The Indian Rupee, South African Rand, Russian Ruble, Turkish Lira and Singapore Dollar all posted gains against the US dollar; while the Brazilian real – one of the biggest losses – printed only a modest 0.1 percent slip. This isheartening, but it shouldn’t yet be considered a definitive foundation of strength – rather it looks more like tentative stabilization. Top news out of the grouping were the reforms introduced by brand new Reserve Bank of India Governor Raghuram Rajan on his first day. The moves seem lasting developments, but they won’t necessarily curb another wave of panicked capital withdrawal should global risk appetite fall apart again.

Gold Developing Congestion Above $1,385, Tepid Demand Despite Dollar Drop

In an unexpected twist, gold stumbled this past session at the same time that the benchmark US dollar dove. Typically, the currency acts as a gauge of demand for traditional fiat and the indirectly the appetite for a viable alternative. The1.5 percent drop for the precious metal was the largest in four weeksand pulled the market back below the closely watched $1,400 on the close. Yet, this particularly large move does not immediately present itself as the catalyst for something more maleficent than a sharp swing within a developing range.

From the fundamental backdrop, the near-certainty of a September Taper continues to rebuild the value of the dollar as a store of wealth, while improved growth and assumed financial stability in other developed leaders curbs the panicked demand for an alternative. From the speculative side, the gold futures volume settled below the monthly average from Tuesday’s three-week high and open interest is still troughing at 389,000 contracts. The 24.6 percent CBOE Gold Volatility Index reading is a constant reminder to traders how risky this ‘safe haven’ can be.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

JPY

Bank of Japan Interest Rate Decision

0.10%

0.10%

Following a USD/JPY breakout, traders will be looking for dovish rhetoric in order to justify confirmation of the trend.

JPY

Bank of Japan 2014 Monetary Base Target

¥270T

1:30

AUD

Trade Balance (Australian dollar) (JUL)

100M

602M

Although stellar Australian GDP data has pushed the Aussi higher, trade balance data as surveyed may cause traders with a positive bias to take a break.

5:30

EUR

French ILO Mainland Unemployment Rate (2Q)

10.6%

10.4%

The unemployment rate in France has been on the rise since early 2011.

5:30

EUR

French Mainland Unemployment Change (2Q)

124K

5:30

EUR

French ILO Unemployment Rate (2Q)

10.9%

10.5%

10:00

EUR

German Factory Orders s.a. (MoM) (JUL)

-1.0%

3.6%

Although YoY orders were 4.3% previously, this is in the context of factory orders in excess of 20% in 2010. Historically, the print is dangerously close to flat.

10:00

EUR

German Factory Orders n.s.a. (YoY) (JUL)

2.9%

4.3%

11:00

GBP

Bank of England Interest Rate Decision

0.50%

0.50%

If policy makers are once again unanimous, a policy statement might not be released. This has been the case previously.

11:00

GBP

Bank of England Asset Purchase Target

375B

375B

11:45

EUR

European Central Bank Interest Rate Decision

0.50%

0.50%

Politicians remain upbeat on PMI data, but market participants may be looking for some more reasonable comments on the economy from ECB officials.

11:45

EUR

European Central Bank Deposit Facility Rate

0.00%

0.00%

12:15

USD

ADP Employment Change (AUG)

180K

200K

Jobs numbers here will provide and excellent backdrop to Friday’s NFPs during a time where employment data is most crucial as traders debate whether the Fed will taper asset purchases at the September FOMC meeting.

12:30

USD

Initial Jobless Claims (AUG 31)

330K

331K

12:30

USD

Continuing Claims (AUG 24)

2984K

2989K

12:30

USD

Non-Farm Productivity (2Q F)

1.6%

0.9%

12:30

USD

Unit Labor Costs (2Q F)

1.0%

1.4%

14:00

USD

Factory Orders (JUL)

-3.4%

1.5%

14:00

USD

ISM Non-Manufacutring Composite (AUG)

55

56

15:00

USD

DOE U.S. Crude Oil Inventories (AUG 30)

-2000K

2986K

The spread between WTI and Brent continues to widen as tensions in Syria push up the price of ICE Brent.

15:00

USD

DOE U.S. Distillate Inventory (AUG 30)

1000K

-316K

15:00

USD

DOE U.S. Gasoline Inventories (AUG 30)

-400K

-587K

23:30

AUD

AiG Performance of Construction Index (AUG)

44.1

The print has not been above 46 since 2010.

GMT

Currency

Upcoming Events & Speeches

ALL

G20 Summit in St. Petersburg, Russia

0:00

USD

Fed's Narayana Kocherlakota Speaks on U.S. Economy

6:30

JPY

BoJ Gov Kuroda Press Conference

12:30

EUR

ECB President Mario Draghi Holds Press Conference

13:00

USD

Fed's Narayana Kocherlakota to Speak on U.S. Economy

17:30

USD

Fed's Fisher Speaks on Economy

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.5900

2.1000

10.7250

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.4800

2.0500

10.5000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.3310

2.0502

10.2476

7.7555

1.2742

Spot

6.5976

5.6503

6.0655

Support 1

12.8900

1.9750

9.3700

7.7490

1.2000

Support 1

6.0800

5.5600

5.8700

Support 2

12.6000

1.9075

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.7400

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3313

1.5743

101.04

0.9454

1.0568

0.9285

0.7999

133.32

1429.84

Res 2

1.3285

1.5712

100.71

0.9431

1.0548

0.9257

0.7975

132.90

1420.86

Res 1

1.3256

1.5681

100.38

0.9407

1.0528

0.9230

0.7950

132.48

1411.89

Spot

1.3200

1.5618

99.72

0.9360

1.0487

0.9175

0.7901

131.64

1393.93

Supp 1

1.3144

1.5555

99.06

0.9313

1.0446

0.9120

0.7852

130.80

1375.97

Supp 2

1.3115

1.5524

98.73

0.9289

1.0426

0.9093

0.7827

130.38

1420.86

Supp 3

1.3087

1.5493

98.40

0.9266

1.0406

0.9065

0.7803

129.96

1429.84

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

Sign up for John’s email distribution list, here.

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05 September 2013 01:23 GMT