Yen Price Action Stands Out in Otherwise Boring Session

MORNING SLICES

FUNDYS

The Asian and European sessions of trade have been fairly quiet, with most currencies caught in some minor consolidation. The only two standouts have been Sterling which had been outperforming early on and the Yen which has been underperforming. The earlier relative strength in the Pound was been attributed to the news that an analyst at Moody’s has come out saying that there is no threat at present for a downgrade to the US and UK sovereign credit ratings. Weakness in the Yen on the other hand has been more flow related, but the disappointing consumer confidence print has not helped. Global equity prices have been well bid, while commodities are also tracking higher on the day. While the economic calendar in the developed world has been subdued, the solid round of data out of China today has not been ignored and has very much helped to encourage investor risk appetite. The sustained recovery in the data has been highlighted by impressive industrial production figures, a shift into positive territory for inflation in November, and healthy new loan figures.

Relative Performance Versus USD on Friday (As of 11:00GMT) –

1)    EURO             +0.21%
2)    SWISSIE        +0.10%
3)    CAD               +0.12%
4)    STERLING     +0.07%       
5)    AUSSIE          -0.04%
6)    KIWI              -0.30%   
7)    YEN               -0.82%

The only material release in European trade, came in the form of UK input and output prices which showed input prices coming in much softer than expected. Also in the UK, the BBC was our reporting that the Treasury in fact wanted to announce tougher spending cuts at the PBR this week, but was overruled by PM Brown. The PM has however come out and rejected this notion. The government has been under intense scrutiny of late over the ballooning levels of debt. Sterling has since been weighed down and has given back overnight gains on the back of these negative  developments. Elsewhere, RBNZ Bollard was out mitigating any moves in the local currency after saying that the latest reaction to monetary policy moves has been an overreaction, suggesting that the central bank is not as hawkish as the markets are pricing.

The two major sources of market fear this week have certainly calmed down, with local officials in Dubai offering reassurances, while in Greece, yield differentials have started to narrow back in favor of the recently downgraded economy. Nevertheless, we still remain skeptical and a recent study brought to our attention by our Chief Strategist gives additional reason for skepticism over any sustainable recovery.The study suggests that an aggressive shift into higher yielding currencies and commodities by hedge funds is often a strong warning sign of a major capitulation in the markets. And based on recent flows, this would imply that over the medium-term, we could be looking at a pullback in carry trades, commodities and global equities. 

Looking ahead, the Canada new house price index (0.40% expected) is slated for release at 13:30GMT, along with US import prices (1.2% expected) and advance retail sales (0.6% expected).  University of Michigan confidence (68.8 expected) and business inventories (-0.2% expected) then follow at 15:00GMT. US equity futures point to a solid open, while commodities are also well bid.

TECHS

EUR/USD The market continues to extend declines with an acceleration seen since the close below the critical 50-Day SMA. Setbacks have now stalled just shy of next key support by 1.4625, but we look for this level to be taken out over the very near-term. A break below 1.4625 will then expose the next downside extension towards 1.4480 further down. It is however worth noting that the market has been supported by a longer trend-line from June which comes in just under 1.4700. Nevertheless, any rallies should be well capped ahead of 1.4850, with daily studies still showing room for additional weakness from here.

USD/JPY (See Below).

GBP/USD Our outlook for the pair remains well intact with the market adhering to the multi-month consolidation after failing ahead of 1.7000 and rolling back over into the well defined range. Tuesday’s break below 1.6250 is significant and should now open a fresh downside extension that exposes a retest on 1.5700 over the coming days. Any rallies are expected to be well capped ahead of 1.6500. Daily studies are approaching oversold but there is still room for the current decline to continue. 

USD/CHF Our core bullish bias is still intact, with the market unable to establish itself on a two-day close basis below parity, ahead of the latest sharp topside reversal. This puts our major bottoming scenario back in play, with a closer look at the weekly chart more clearly defining the reversal formation. The neckline for the base comes by 1.0340, and a break above this level will confirm bias and accelerate gains back into the 1.0700's. Ultimately, only a close back under 0.9915 would negate outlook and give reason for pause. For now, look for any intraday setbacks to be well supported ahead of 1.0100.

FLOWS

Portfolio managers and ETF investors buying gold; hedgers selling. Real money accounts selling Eur/Cad. Swiss private bank and soveriegn account bids in Gbp/Usd. German bank on the offer in Eur/Gbp. EU Semi-official on the offer in Eur/Usd. Mondel funds bidding Aussie and Kiwi.
 

TRADE OF THE DAY

Usd/Jpy: The corrective rally out from the recent 84.80 multi-year lows has stalled out, and a fresh lower top is now sought out below 92.35, by 90.80, ahead of an eventual retest and break below 84.80. The overriding trend is still intensely bearish and market participants should look to take advantage of the current bounce to build on short positions. Any intraday rallies are expected to be well capped ahead of 90.80 for now, with only a close back above this level giving reason for concern. STRATEGY: SELL @89.30 FOR AN OPEN OBJECTIVE; STOP 90.90. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE ON FRIDAY. 3X LEVERAGE.

PORTFOLIO OVERVIEW

P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio was created in June to track and mirror all recommendations and trades. Below is a return on equity curve since inception on June 1, 2009, along with an open and closed position tracker. I am hopeful that this will make things easier for you all.

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
If you wish to receive Joel's reports in a more timely fashion, e-mail jskruger@fxcm.com and you will be added to the "distribution" list.

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