Yen is the Only Source of Real Volatility in Otherwise Quiet Holiday Trade

FUNDYS

The news of an emergency Yen meeting in Japan on Monday was enough to get markets moving at the start of Asian trade with a risk on approach taken on the expectation that the Bank of Japan would introduce new measures to stimulate the economy and curb the strength in the local currency. While the major currencies only really jumped out to marginal gains on the Asian open, the commodity bloc showed some impressive early gains on the back of this news, with Aussie, Kiwi and Cad all tripping some stops to help accelerate gains.

Relative Performance Versus USD Monday (As of 11:00GMT)

1. YEN+0.67%
2. STERLING+0.12%
3. CAD+0.09%
4. AUSSIE-0.11%
5. SWISSIE-0.13%
6. KIWI-0.18%
7. EURO-0.48%

However, in the end, the policy meeting proved to be a let down, with the central bank still seemingly not too concerned with the need to fight against severe deflationary threats and a rapid appreciation in the Yen. The BOJ lifted the amount of funds available for the second time under the fixed rate facility that was set up last December, while also lengthening the maturity from 3 months to 6 months. The immediate fallout from this action was risk negative, and Yen positive, with the Yen rallying and commodity currencies selling off quite sharply as a result of the unimpressive central bank moves.

Elsewhere, data released in Asia was not risk supportive, with Kiwi trade coming in wider, Aussie inventories softer, and UK Hometrack housing weaker than previous readings. Meanwhile, in European trade, Eurozone confidence numbers were broadly in line with expectation, while Norwegian retail sales were significantly stronger. On the whole, a very light day of trade thus far, with the UK bank holiday contributing to the lackluster trade. With the exception of the Yen, most currencies have been fairly stable.

Looking ahead, things could pick up a bit in North American trade, with Canada current account (-$10B expected), industrial product prices (0.4% expected) and raw materials prices (0.2% expected) all due at 12:30GMT. Also out at 12:30GMT are US personal consumption (0.1% expected), personal income (0.3% expected), and personal spending (0.3% expected). Dallas Fed manufacturing (-16% expected) is then due at 14:30GMT. On the official circuit, Fed Bullard is slated to speak in St. Louis at 17:30GMT. US equity futures point to a mildly bid open, while both oil and gold are tracking slightly lower by some 0.35% and 0.10% respectively.

GRAPHIC REWIND

TECHS

EUR/USD: The latest bounce out from 1.2585 is classed as corrective and the market looks to be in the process of seeking out the next lower top below 1.2925 ahead of a fresh drop below 1.2585 and towards 1.2480 further down. Any rallies should be very well capped ahead of 1.2900, while a close back below 1.2675 would also help to reaffirm bearish outlook. In the interim, we recommend that traders take to the sidelines tol allow for this latest consolidation to play out.

USD/JPY: While the market trades below the 20-Day SMAs on a close basis, the downtrend remains intact and deeper setbacks below 83.60 can not be ruled out. A close above the 20-Day SMA will be required at a minimum to offer some form of relief to downside pressures. The market has not closed above the 20-Day SMA since mid-June when the pair was trading over 90.00.

GBP/USD: Although the inter-day structure looks quite bearish at present following the latest break below 1.5500, there is a shorter-term risk for additional upside to allow for recently oversold technical studies to unwind. However, we expect any rallies to be well capped ahead of 1.5700 in favor of the next downside extension towards the 100-Day SMA by 1.5100. Setbacks have been supported for now by the 50-Day SMA. Ultimately, only a break back above 1.5700 would negate outlook and give reason for pause. Back under 1.5370 accelerates declines.

USD/CHF: Has managed to break to yet another multi-week low below 1.0300 to open a fresh downside extension towards the yearly lows from January by 1.0130 over the coming sessions. However, any additional declines below 1.0130 are seen limited, with medium-term studies looking stretched. As such, we would be more inclined to be looking for opportunities to buy at current levels. For now, a break and close back above 1.0320 will be required to relieve immediate downside pressures.

FLOWS

Various hedge funds looking to buy Usd/Jpy at 84.50. M&A related offers in Eur/Usd. US account bidding Aud/Usd; Local name on the offer. Buy interest building in Usd/Cad by 1.0400.

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Written by Joel Kruger, Technical Currency Strategist for DailyFX.com

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