Markets Continue to Push Yen and Franc Higher Despite Official Concern

FUNDYS

Please take note that I will be off the desk for the remainder of the week and look forward to returning next week.

We have seen yet another fresh multi-year low for USD/JPY below 83.50, and despite ongoing concerns from Japanese officials over the strength in the local currency, market participants are content on buying the Yen until proven otherwise. The broad based reduction in risk appetite has not helped matters, with heavy selling seen in the Yen crosses and Eur/Chf.

Relative Performance Versus USD Wednesday (As of 9:00GMT)

1)STERLING +0.51%

2)AUSSIE +0.42%

3)SWISSIE +0.18%

4)YEN +0.01%

5)EURO -0.05%

6)CAD -0.14%

7)KIWI -0.19%

The Eur/Chf cross is another market making headlines, with the cross breaking to yet another fresh record low below 1.2800. While the Japanese economy is struggling, the Swiss economy has managed to hold up much better on a relative basis, making the Franc a very attractive investment in a safe-haven environment.

Meanwhile, the Euro has been hit hard across the board, with the single currency under renewed pressure as fears over the state of the European banking system escalate. Interestingly, the Euro is even getting hit hard against higher yielders like the Aussie, despite what would normally be a higher Eur/Aud cross rate in a risk averse market. But the fact that the very source of the risk aversion has originated directly from the Eurozone makes the price action somewhat more intuitive.

On the data front, the German current account was narrower than expected, while the trade balance was wider. Meanwhile, in the UK, Halifax house prices exceeded consensus estimates, while industrial production was softer and manufacturing production was in-line. Looking ahead, German industrial production (1.0% expected) is due just ahead of the North American open at 10:00GMT.

Attention then shifts to Canada, where building permits (-4.9% expected) are out at 12:30GMT, followed by the more highly anticipated Bank of Canada rate decision in which the central bank is expected to lift rates by 25bps to 1.00%. There is one more Canada release then out at 14:00GMT, in the form of Ivey PMI (55.5 expected). For the US, all of the action is in the afternoon, with the Beige Book set for release at 18:00GMT, followed by consumer credit (-$4.3B expected) at 19:00GMT. On the official circuit, Fed Kocherlakota speaks at 18:30GMT in Montana. US equity futures and oil prices continue to drag lower, while gold trades marginally higher.

GRAPHIC REWIND

TECHS

EUR/USD: The latest rally has been well capped ahead of key short-term resistance by 1.2925, with the market now looking like it is poised for a bearish resumption back towards 1.2585 over the coming sessions. Coiling 10/20/50/100-Day SMAs warn of a major move ahead and given broader price action, it looks as though this move could be to the downside. In the interim, key levels to watch above and below come in by 1.2800 and 1.2625 respectively. Ultimately, only back above 1.2925 would negate outlook and give reason for pause.

USD/JPY: While the market trades below the 20-Day SMAs on a close basis, the downtrend remains intact and deeper setbacks below 83.00 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: The market looks poised for a fresh drop following the latest bout of consolidation, with a lower top now confirmed by 1.5600, following the break back below 1.5370. Below 1.5370 now exposes a more meaningful drop to test next key medium-term support by the 100-Day SMA in the 1.5100 area. Ultimately, only back above 1.5700 would negate bearish bias and give reason for pause.

USD/CHF: Has finally managed to take out the yearly lows from January by 1.0130, with the market easily dropping below this level to 1.0065 thus far. However, any additional declines below 1.0065 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 1.0240 will be required to relieve immediate downside pressures.

FLOWS

Real money and hedge fund buying of Aussie, a Swiss bank and Middle Eastern name buying francs. An ACB on the bid in Eur/Usd and Cable. A major Japanese name has been noted repeatedly selling in Usd/Jpy on behalf of exporters.

TRADE OF THE DAY

Eur/Aud: We attempted to establish a counter-trend long with the market looking very stretched after breaking to fresh +20 year lows on Wednesday. But the trade has been underwater from the get-go, and it looks as though there could be additional declines before any form of a base is formed. A closer look at the longer-term chart above shows just how well supported the market should be at current levels and while we are not as confident with the fate of the current position, we do like the idea of continuing to attempt to play the long side of this cross on dips. POSITION: LONG @1.3930 FOR AN OPEN OBJECTIVE; STOP 1.3825.

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

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