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Forex: Japanese Yen Rebound Ensues After Ultra Dovish Abe Wins Elections

By , Currency Analyst
17 December 2012 12:00 GMT

ASIA/EUROPE FOREX NEWS WRAP

FX markets are askew to start the week following significant Japanese election results, which will now likely yield a much more dovish Bank of Japan. Shinzo Abe’s Liberal Democratic Party won a sweeping majority in the lower house of parliament, and with another faction now has the two-thirds majority vote to essentially legislate unabated. What will this new government bring?

If anything is expected to come from this election, it’s that the BoJ would be much weaker: an unlimited easing scheme is in the cards, as is a doubling of the central bank’s inflation target. Given the fact that this most likely will entail some combination of large scale asset purchases, expanding the balance sheet, and/or implementing negative interest rates, it’s of little surprise that the Japanese Yen has been under pressure since mid-November, when then-Prime Minister and former BoJ Governor Hiroshiko Noda announced snap elections.

But thus far, it appears that the Yen is doing its best impersonation of the US Dollar and the Federal Reserve’s QE3 announcement in September; this is another ‘buy the rumor, sell the news’ type of event. The Yen immediately gapped lower to start the week, but has since recovered ground – and on the surface, given Mr. Abe’s intended policies for the BoJ, this makes little sense. But a deeper look into various Yen-crosses (AUDJPY, EURJPY, USDJPY) suggests that a technical rebound could be due, as price has found itself to significant multiyear levels of resistance. Furthermore, when considering positioning, as measured by the CFTC’s Commitment of Traders report, net non-commercial futures positions are at their shortest level since July 2007. In other words, being short the Yen is very popular right now, and few sellers remain; risk-reversal (for Yen strength) is high.

Elsewhere, taking a look at European credit, bond yields are mixed, neither hurting nor helping the Euro. The Italian 2-year note yield has decreased to 1.987 % (-2.1-bps) while the Spanish 2-year note yield has increased to 2.803% (+1.9-bps). Similarly, the Italian 10-year note yield has decreased to 4.576% (-1.4-bps) while the Spanish 10-year note yield has increased to 5.393% (+3.9-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 11:15 GMT

EUR: +0.57%

GBP: +0.57%

GBP: +0.54%

NZD:+0.06%

AUD:+0.02%

JPY:-0.11%

CAD:-0.30%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.08% (-0.32% past 5-days)

ECONOMIC CALENDAR

Forex_Japanese_Yen_Rebound_Ensues_After_Ultra_Dovish_Abe_Wins_Elections_fx_news_technical_analysis_body_x0000_i1031.png, Forex: Japanese Yen Rebound Ensues After Ultra Dovish Abe Wins Elections

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

TECHNICAL ANALYSIS OUTLOOK

Forex_Japanese_Yen_Rebound_Ensues_After_Ultra_Dovish_Abe_Wins_Elections_fx_news_technical_analysis_body_Picture_1.png, Forex: Japanese Yen Rebound Ensues After Ultra Dovish Abe Wins Elections

EURUSD: Price action Friday led to an enormous breakout in the US session, bucking recent conventional wisdom that afternoon US trading sessions at the end of the week tend to be bland. The same descending trendline off of the September and October highs which served as resistance throughout December broke, allowing for a quick move up towards the post-QE3 September high at 1.3170/75. Now, support is 1.3145, 1.3075/90, and 1.3010/30. Resistance is 1.3170/75 and 1.3280/85 (May high).

Forex_Japanese_Yen_Rebound_Ensues_After_Ultra_Dovish_Abe_Wins_Elections_fx_news_technical_analysis_body_Picture_3.png, Forex: Japanese Yen Rebound Ensues After Ultra Dovish Abe Wins Elections

USDJPY: The Bull Flag on the daily broke on Thursday above 82.90; and the pair peaked near the mid-March highs above 84.00. As noted last week, “With the Fed out of the way, the Yen’s fundamentals could help lift this pair higher.” Now, with the USDJPY at significant resistance and the Japanese elections done, some sideways if not bearish price action could result. Support comes in at 83.30/55, 82.90/83.00, and 81.75.Resistance is 84.00/20 (March high).

Forex_Japanese_Yen_Rebound_Ensues_After_Ultra_Dovish_Abe_Wins_Elections_fx_news_technical_analysis_body_Picture_4.png, Forex: Japanese Yen Rebound Ensues After Ultra Dovish Abe Wins Elections

GBPUSD: Although the GBPUSD put in a reactionary high on Wednesday, it has since broken the mid-October/early-November highs. However, without 1.6300 touched, my levels remain the same. Resistance comes in at 1.6170/80 (breaking now) and 1.6300/10 (post-QE3 announcement high in mid-September). Support is 1.6070/75 (20-EMA), 1.6030/35 (50-EMA) and 1.5970/75 (100-DMA).

Forex_Japanese_Yen_Rebound_Ensues_After_Ultra_Dovish_Abe_Wins_Elections_fx_news_technical_analysis_body_Picture_5.png, Forex: Japanese Yen Rebound Ensues After Ultra Dovish Abe Wins Elections

AUDUSD:No change from Thursday: “The AUDUSD couldn’t break descending trendline resistance off of the July 2011 and February 2012 highs, which come in at 1.0550/55 today, but that doesn’t mean the uptrend is over just yet. With price holding just below the monthly R2 at 1.0570 and thelong-term Symmetrical Triangle starting to break to the upside, consolidation may be ahead the next few sessions. Support is at 1.0500/15, 1.0460, and 1.0235/80. Resistance is 1.0555/75 and 1.0605/25 (August and September highs).” Note: this is a weekly chart to highlight how close the AUDUSD to a potential breakout.

Forex_Japanese_Yen_Rebound_Ensues_After_Ultra_Dovish_Abe_Wins_Elections_fx_news_technical_analysis_body_Picture_6.png, Forex: Japanese Yen Rebound Ensues After Ultra Dovish Abe Wins Elections

S&P 500: No change from Thursday: “The S&P 500 has set a new December high, breaking above the early-November highs but failing in the key 1435/40 zone. Accordingly, the pair is back at1425, the 61.8% Fibonacci extension off of the November 16 low, the November 23 high, and the November 28 low extension. Support comes in at 1425 (holding now), 1400, 1388 (200-DMA) and 1345/50 (November low). A move higher through 1435/40 points to 1450 and 1470/75.”

Forex_Japanese_Yen_Rebound_Ensues_After_Ultra_Dovish_Abe_Wins_Elections_fx_news_technical_analysis_body_Picture_7.png, Forex: Japanese Yen Rebound Ensues After Ultra Dovish Abe Wins Elections

GOLD: No change from Thursday: “Gold has fallen back a bit as the US Dollar has rebounded in the face of another QE package. Now that Gold is back below 1700, I expect buying interest to resume; though it should be noted that December is historically a bad month for precious metals. I will continue to look to get long as low as 1675. Resistance is 1735, 1755/58 and 1785/1805. Support is 1700, 1670/75 (November low), and 1660/65 (200-DMA).”

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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17 December 2012 12:00 GMT