Yen Recovers Some Overnight Setbacks; US Dollar Broadly Bid

• Bank of Japan intervenes after fresh record Yen high, but Yen finds renewed bids
• US Dollar rallies sharply across the board on renewed global concerns
• Lack of safe haven options should open the door for more USD strength
• Core USD bullish outlook still very much intact
• Short Aud/Usd trade survives after stops narrowly averted
• European data comes in on the softer side of expectations

The catalyst for the broad based US Dollar bullish reversal has certainly come from the Japanese intervention, but as we head into the North American open, it looks as though increased doubts over the success of the latest EU package and ongoing concerns over the health of the global macro economy continue to weigh on sentiment. Economic data released in Europe on Monday was far from strong, with German retail sales coming in much softer, Eurozone inflation and unemployment higher, and UK data also disappointing on the whole. Meanwhile, we have warned of the potential spread of the Eurozone fallout into other economies, and some softer data out from the relatively strong Norway could be warning of further broad based deterioration. Additionally, while Greek bond spreads have narrowed, it is well worth noting that other peripheral spreads continue to widen including Italy, Spain, and Belgium.

Relative performance versus the USD on Monday (as of 10:50GMT)

1. CAD -0.55%
2. GBP -0.71%
3. CHF -0.95%
4. EUR -1.07%
5. NZD -1.14%
6. AUD -1.20%
7. JPY -2.65%

Since the Japanese intervention early Monday, The Yen has managed to recover into the North American open, with the currency making back more than a third of its +4% declines which resulted in a massive Usd/Jpy surge to 79.55. We believe that comments from bank of Japan’s Shirakawa have been influencing the resumption of Yen bids, after the central banker seemed to downplay the intervention from the Ministry of Finance and went as far as to discuss the merits of a stronger currency to the Japanese economy. Still, technically, we see good reason for the formation of a major Usd/Jpy base and will be looking for additional broad based Yen depreciation over the coming weeks and months.

What is even more interesting to us is the impact of this move on the US Dollar going forward. We believe that the potential elimination of the Yen as a viable safe-haven option following this latest intervention will now result in only one currency being able to benefit from any risk off flows in the markets going forward. The Swiss Franc was knocked out of the picture several weeks back when the SNB stepped in and declared that they would not allow their currency to continue to appreciate, and now Japan has done the same with the Yen. The US Dollar is therefore the only traditional safe haven currency left to trade into in risk off market environments and as such, we see the buck in a position to benefit greatly over the coming months while the global economy continues to try and sort itself out.

We are definitely relieved and pleased to see this type of broad based price action early Monday after having our core bullish US Dollar outlook tested in recent weeks. While we are far from out of the woods at this point, we contend that the US Dollar has finally put in the next key higher low ahead of a bullish resumption which eventually should result in a clearance of its early October highs against most currencies.

On Friday, we cited technical evidence that continued to support our core USD bullish outlook, with the Euro still looking quite bearish on the monthly chart and unable to clear the September highs despite a massive rally in October. At the same time, our convictions were seriously tested, and the market stalled just shy of those critical highs to barely keep our outlook intact. We used the broad USD sell-off to establish a major short position in Aud/Usd, and here too, our strategy was dangerously compromised after stops were narrowly averted in the previous week. Still, the market managed to stall out ahead of the September highs and did not close above our 1.0750 stop level, ahead of this latest major short-term reversal on Monday which has taken us back to our short entry by 1.0550. From here, we look for continued declines in Aud/Usd back below parity over the coming days.

Looking ahead, all eyes will be on Canada GDP data due at 12:30GMT, while in the US, Chicago PMIs and Dallas Fed manufacturing will also get attention. Another mover of price action and generator of volatility on Monday could come from month end flows. Overall, it will be a very busy week in the FX markets, with a slew of event risk due throughout, starting with the highly anticipated RBA rate decision out of Australia early Tuesday. The Fed will meet on Wednesday and then a new reign begins with Mr. Draghi heading up the ECB rate decision on Thursday. US equity futures and commodities are tracking a good deal lower into the North American open.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: It has been very difficult to retain a bullish USD outlook in the short-term, with the Euro rallying so aggressively in the month of October. However, we continue to take our cues from the longer-term monthly chart which shows a different picture and significantly mitigates the USD beating on the daily chart. The monthly chart shows the market in a downtrend off of the record highs from 2008 and in the process of carving the next lower top ahead of a move back towards the 1.2000 area. Despite the latest surge in October, the price is still holding below September’s high and we look for gains to stall out somewhere ahead of 1.4390 in favor of a bearish resumption. Ultimately, only back above 1.4390 would delay and give reason for concern. Monday’s price action is definitely helping to confirm outlook.

USD/JPY:Monday’s surge has resulted in an end to a very tight multi-week trade largely confined to the 76.00’s and a likely shift in the overall construct, with the pair carving out a major bottom by 75.50. The price has now broken back above the daily Ichimoku cloud for the first time in several months to confirm a potential shift in the trend, and we will look for a close above the cloud on Monday (78.00) to officially confirm bias. Next key topside resistance comes in by 80.25 and a break above this level will likely accelerate gains and expose the 82.00-85.00 area further up. Intraday setbacks should now be well supported above 77.00 on a daily close basis.

GBP/USD: The market has finally reached the major double bottom objective just over 1.6100 that was triggered on the break of neckline resistance at 1.5715 back on October 12. From here, scope is for a resumption of what we believe to be a broader downtrend and we expect the 200-Day SMA, which coincides with the double bottom objective, to cap gains on a daily close basis ahead of the next major downside extension. Look for a break and close back below 1.5950 to confirm and accelerate, while only a close above the 200-Day SMA negates. Monday’s price action encourages outlook.

USD/CHF: The market has been in the process of a major correction since peaking out at 0.9315 on October 6. However, the overall outlook remains constructive, with the pair looking like it is in the process of carving a major base ahead of some significant upside over the coming weeks and months. Look for the latest round of setbacks to be well supported in the 0.8500’s, where a fresh medium-term higher low is sought out ahead of a bullish resumption back towards and eventually through 0.9315. Ultimately, only a weekly close below 0.8500 would concern.

--- Written by Joel Kruger, Technical Currency Strategist

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