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Forex: Japanese Yen Crosses Plunge, Threaten Large Scale Reversal

By , Chief Currency Strategist
09 April 2014 03:41 GMT

Talking Points:

  • Dollar Suffers Biggest Drop Since October as Yields Slide
  • Japanese Yen Crosses Plunge, Threaten Large Scale Reversal
  • British Pound Rallies as Data Solidifies BoE Rate Hike Hopes

Dollar Suffers Biggest Drop Since October as Yields Slide

Risk trends have little to do with the dollar’s performance as of late. Instead, the currency seems to be finding its bearings from interest rate expectations and the capital flows they are encouraging. On the sentiment side of the benchmark, we found equity markets stabilizing after the sharp Friday / Monday tumble that followed last week’s US employment statistics. The FX-based VIX index, meanwhile, extended its slump to 16-month lows (6.92 percent) to deflate any expectations that an impending explosion in financial markets would necessitate an extreme liquidity haven like the greenback. This is more of a contributing aspect to the dollar’s weakness rather than the driver. Alternatively, rate forecasts are under power. The two-year Treasury yield is stabilizing off is 17 percent off its 7-month high and 3-month market rate is at a record low.

Japanese Yen Crosses Plunge, Threaten Large Scale Reversal

The Japanese yen surged(crosses plummeted) the most in six months Tuesday. There is very likely an elemental ‘risk’ aspect to this move. Heading into the Bank of Japan (BoJ) rate decision Tuesday morning, the carry trade-derived pairs were curbed from following the ‘risk off’ move Monday as traders deferred such a speculative move ahead of key event risk. When the central bank confirmed what the market had expected (yen cross bull’s feared) that they would not immediately upgrade the open-ended QE program they introduced last April, there were two reasons to see the exchange rate tumble: catch up to risk trends and fear that the heavy-handed manipulation has met its limitations. We now have USDJPY and company at critical support. A hold on QE can weigh these pairs, but risk aversion may be needed to break.

Watch my video on my outlook for the Japanese Yen crosses and the serious trade potential they represent.

British Pound Rallies as Data Solidifies BoE Rate Hike Hopes

GBPUSD surged this past session, posting its biggest daily advance since February 12 – in the midst of a 550-pip bull run. Is this a drive of similar convictions that can see the pair forge new four-year highs above 1.6800? That depends on what keeps the market running. When we look at the sterling’s performance across the majors, we can see that the currency was perhaps not as strong as the cable insinuates – more a dollar rather than a pound move. The fundamental docket this past session offered up its supportive elements. The NIESR GDP estimate for March (the series has a high correlation to official GDP data) held at its highest level since July 2010 (0.9 percent). Also, industrial production offered a big jump. The disappointment was the BRC inflation report which hit a series low -1.7 percent. Ahead, we have trade data.

Euro Traders Look to Trade Figures then Vital Periphery Update

Another wave of ECB officials took to the newswires this past session to weigh in on market and economic conditions – with a few marginal and indirect comments about the currency. The effort to talk the currency down without necessitating a policy move seems a concerted strategy even if it isn’t proving particularly successful. So long as large funds and central banks diversify back into euros, the central bank balance sheet contracts with LTRO payments and speculators seek out the higher returns of the region’s crisis-inflated yields; the market will limit its concern with what policy officials ‘want’. The session ahead is this week’s lull with German and Portuguese trade futures (watch out for a possible 5-year Greek bond auction). Thursday, inflation readings for the periphery taps into the ECB’s deflation risk assessment.

Australian Dollar Rally at Stake with Key Aussie, Chinese Data Ahead

Though it wasn’t exactly necessary for the Aussie dollar’s performance, the stabilization in equities – as a standard risk measure – helped the currency along this past session. Up against all but the yen, the high-yield unit is at or near four-month highs versus the US dollar, Euro, Pound and Canadian dollar. This is a trend that is gaining fundamental traction through rate expectations, but an unwind of dovish fears can only carry us so far. To extend the theme and move, we need to start seeing the outline for the first eventual RBA rate hike. Neither government bond yields nor swaps are that hawkish. Perhaps the upcoming data can help shape the forecast. March employment figures and inflation expectations are a strong monetary policy update. China’s trade report could also generate AUD volatility.

Chinese Yuan Advances Sharply as Default Risk Eases and Local Equities Surge

The off-shore Chinese currency (the CNH or offshore Renminbi) advanced 0.3 percent against the benchmark dollar Tuesday – the biggest move in a month and its third consecutive advance. This currency’s performance has significantly deviated from the Emerging Market aggregates and most of the other liquid EM currencies – and for good reason. China is exercises some control over its exchange rate by setting the yuan reference rate on a daily basis (allowing for a 2 percent fluctuation around that rate). The rate fix today was 6.149 – an increase on the day. This may reflect a move by authorities to ease back on their effort to dissuade speculative interests behind a one-way China carry trade. Another serious area of support is the slow retreat in Chinese default swap premium and the Shanghai Composite’s 1.9 percent surge.

Emerging Markets Gap Higher on Increased Volume

The MSCI Emerging Market ETF jumped another 1.2 percent higher Tuesday to set a fresh four-month high for the measure. Volume behind the move was second only to Friday’s risk shock for the past two months. Performance amongst the group’s currencies was heavily skewed positive. The worst performance amongst the liquid EM currencies was from the Mexican Peso – though this was a correct after an intraday high that saw the currency hit a 2014 peak against the dollar. For the upcoming docket, the listings are light, but Mexico’s CPI figures can shape rate expectations for USDMXN. Meanwhile, EM FX traders should watch the same benchmark as equities traders: volatility and risk.

Gold Advances Against Dollar but Not Versus the Yen or Aussie Dollar

Oftentimes, commodity traders forget that the pricing instrument can have a material effect in the perceived valuation of their trade. This particularly true of gold whose anti-currency appeal has generated serious fluctuation for the metal. Through this past session, spot gold managed a 0.9 percent advance with a modest uptick in derivative volume (ETFs and futures). Yet, the lack of momentum and turnover still calls into question the conviction. It further begs the question: what percentage of this performance was gold’s innate strength versus the dollar’s universal weakness. When we price the metal in Yen, Australian dollars, euro, pounds or other currencies; its performance was either negative or unchanged. While gold may be an anti-dollar commodity, there are plenty of other currencies that will attract the capital first.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Westpac Consumer Confidence Index (APR)

99.5

Consumer Confidence is currently a full point below its historical average. Overall the index has rebounded since the start of the year by approximately 4.1 points.

0:30

AUD

Westpac Consumer Confidence (APR)

-0.7%

1:30

AUD

Home Loans (FEB)

1.5%

0.0%

6:00

EUR

German Trade Balance (euros) (FEB)

17.5B

15.0B

An increase in the German Trade Surplus could instigate appreciation in the Euro

8:30

GBP

Visible Trade Balance (Pounds) (FEB)

-£9400

-£9793

The United Kingdom’s Trade Deficit has increased dramatically since the beginning of 2014 (-2131). This deficit is expected to fall slightly in the midst of recent trends of reshoring in the UK.

8:30

GBP

Trade Balance Non EU (Pounds) (FEB)

-£3400

-£3990

8:30

GBP

Total Trade Balance (Pounds) (FEB)

-£2100

-£2565

11:00

EUR

Portugal Trade Balance (FEB)

-€925Mln

11:00

USD

MBA Mortgage Applications (APR 4)

-1.2%

22:00

NZD

ANZ Truckometer Heavy (MoM) (MAR)

2.3%

The NZ Performance of Manufacturing Index has held steady around 56.5 for the past four months.

22:30

NZD

Business NZ PMI (MAR)

56.2

23:50

JPY

Japan Buying Foreign Stocks (Yen) (APR 4)

¥31.3B

Japan has made significant strides in reaching its inflationary target of 2.0% per annum. Further expansion of the monetary base could promote shorts on the yen and vice versa.

23:50

JPY

Japan Buying Foreign Bonds (Yen) (APR 4)

-¥763.6B

23:50

JPY

Bank Lending Banks inc Trusts (YoY) (MAR)

2.2%

23:50

JPY

Bank Lending Banks ex Trusts (YoY) (MAR)

2.4%

GMT

Currency

Upcoming Events & Speeches

5:00

JPY

Bank of Japan Publishes Economic Report

9:45

EUR

ECB's Sabine Lautenschlaeger Speaks on Euro Economy

17:00

USD

US to Sell $21 Bln in 10-Year Notes

18:00

USD

Federal Open Market Committee March 18-19 Meeting Minutes

18:00

EUR

ECB's Benoit Coeure Speaks on Euro Economy

19:30

USD

Fed's Charles Evans Speaks on U.S. Economy

23:00

USD

Fed's Daniel Tarullo Speaks on U.S. 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

14.0200

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.0537

2.0941

10.4413

7.7536

1.2502

Spot

6.4974

5.4134

5.9751

Support 1

13.0000

2.0700

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

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

1.3878

1.6844

102.78

0.8903

1.1003

0.9444

0.8764

141.87

1331.08

Res 2

1.3856

1.6820

102.56

0.8887

1.0985

0.9425

0.8745

141.54

1325.61

Res 1

1.3834

1.6795

102.35

0.8871

1.0967

0.9405

0.8726

141.21

1320.13

Spot

1.3791

1.6746

101.92

0.8840

1.0931

0.9366

0.8687

140.55

1309.17

Supp 1

1.3748

1.6697

101.49

0.8809

1.0895

0.9327

0.8648

139.89

1298.21

Supp 2

1.3726

1.6672

101.28

0.8793

1.0877

0.9307

0.8629

139.56

1292.73

Supp 3

1.3704

1.6648

101.06

0.8777

1.0859

0.9288

0.8610

139.23

1287.26

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

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09 April 2014 03:41 GMT