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Sabre-Rattling Continues as G7 Acknowledges Japan’s Yen Policy

By , Currency Analyst
12 February 2013 13:10 GMT

ASIA/EUROPE FOREX NEWS WRAP

With major central bankers and politicians convening this week in Moscow, Russia, some of the bigger players have come out with some choice words on recent movement in FX markets. Undisputedly, 2013 has been characterized by nothing short of increased volatility across the majors – despite this volatility being absent in other asset classes – and today has proved to be a continuation of that trend.

Japanese Finance Minister Taro Aso started off the day by saying that G7 leaders soothed concerns that Japanese policies were aimed at weakening the Yen, rather than at trying to help the economy. “Abenomics,” as the policies have been dubbed, involve stimulating the economy to that point that inflation kicks back in, otherwise known as “reflation.” Markets have thus far interpreted this as a green light for further risk taking, with the safe havens, the US Dollar and the Yen, falling sharply in hours ahead of the US trading session. If the G7 is endorsing Japan’s policy of reflation, they are endorsing the sharp depreciation of the Yen; perhaps the Yen collapse is only in its beginning phases.

It wouldn’t be a true ‘currency war’ (I term I despise as these policies being so publicly discussed are far from new, but it’s the accepted meme-du-jour, so here we are) unless there were other players in the market, so of course the Swiss National Bank’s Thomas Jordan – the architect of the EURCHF floor at 1.2000 – had to chime in and say that the SNB expects the Franc to fall further; this too has yielded additional risk taking. With the Bank of England inflation report due tomorrow with a underlying dovish tone – one inherent of more easing – expect another shot to be fired.

Taking a look at European credit, peripheral yields have compressed this morning, giving the Euro breathing room to get higher. The Italian 2-year note yield has decreased to 1.628% (-7.1-bps) while the Spanish 2-year note yield has decreased to 2.651% (-7.4-bps). Likewise, the Italian 10-year note yield has decreased to 4.487% (-12.3-bps) while the Spanish 10-year note yield has decreased to 5.277% (-12.2-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 11:30 GMT

CHF: +0.38%

EUR: +0.35%

JPY: +0.04%

NZD:-0.02%

AUD:-0.08%

CAD:-0.21%

GBP:-0.36%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.03% (+0.83 % past 5-days)

ECONOMIC CALENDAR

Sabre-Rattling_Continues_as_G7_Acknowledges_Japans_Yen_Policy_body_Picture_7.png, Sabre-Rattling Continues as G7 Acknowledges Japan's Yen Policy

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

TECHNICAL ANALYSIS OUTLOOK

Sabre-Rattling_Continues_as_G7_Acknowledges_Japans_Yen_Policy_body_Picture_6.png, Sabre-Rattling Continues as G7 Acknowledges Japan's Yen Policy

EURUSD: Price has rebounded above 1.3400, but for the most part, the view remains the same: “Price has steadied below 1.3400, entering the Bull Flag range set in mid-January, from 1.3280 to 1.3390. On lower-term timeframes, a Bear Flag may have formed, with the measured move pointing to 1.3280/300. A break lower can’t be ruled out, but as long as the ascending trendline off of the mid-December and early-January lows holds at 1.3215/35, any setbacks are seen as near-term corrections.”

Sabre-Rattling_Continues_as_G7_Acknowledges_Japans_Yen_Policy_body_Picture_5.png, Sabre-Rattling Continues as G7 Acknowledges Japan's Yen Policy

USDJPY: No change: “Further bullish price action as US Treasury yields strengthen and speculation over BoJ policy arises again.” Resistance comes in at 93.40/45 (monthly R1), 93.85 (weekly R1) and 94.00/10. Support comes in at 92.90/95 (weekly pivot), and 91.75/95 (weekly S1).

Sabre-Rattling_Continues_as_G7_Acknowledges_Japans_Yen_Policy_body_Picture_4.png, Sabre-Rattling Continues as G7 Acknowledges Japan's Yen Policy

GBPUSD: No change: “The pair is holding below the 61.8% Fibonacci retracement from the June low to January high, vindicating the “cover on dips, sell rallies” perspective. I continue to look to sell rallies in the pair as significant RSI divergence exists. A hold below 1.5675 eyes a move towards 1.5500, and ultimately, 1.5265/70, the June low. Resistance comes in at 1.5825 and 1.5885/90. Support is 1.5675 and 1.5580 (monthly S1).”

Sabre-Rattling_Continues_as_G7_Acknowledges_Japans_Yen_Policy_body_Picture_3.png, Sabre-Rattling Continues as G7 Acknowledges Japan's Yen Policy

AUDUSD:No change: “The bounce from the 1.0265/90 area may have completed, with the rally halted at the 200-DMA at 1.0305/10. The pair is sitting at the 100% extension at 1.0265 now, and a break implies a deeper setback towards 1.0135/75, early-September and –October swing lows, as well as the 161.8% extension.”

Sabre-Rattling_Continues_as_G7_Acknowledges_Japans_Yen_Policy_body_Picture_2.png, Sabre-Rattling Continues as G7 Acknowledges Japan's Yen Policy

S&P 500: Tuesday I said: “as indicated on the charts the past weeks, noting “nearing the top 1505/1512” – the top was 1504.6. If this breaks, 1520 is in sight.” Indeed, the irrational exuberance has continued, bringing topline Bearish Rising Wedge resistance in focus at 1520; the December 2007 highs of 1520/24 could be reached on an overshoot. The 100% Fibonacci extension on the fiscal cliff rally and flag comes in at 1530. Bottom line: I’m expecting a significant setback (-10%) in the S&P 500 unless volumes accelerate rapidly, given the disconnect from reality.

Sabre-Rattling_Continues_as_G7_Acknowledges_Japans_Yen_Policy_body_Picture_1.png, Sabre-Rattling Continues as G7 Acknowledges Japan's Yen Policy

GOLD: The past few weeks I’ve maintained: "When considering the move off of the September highs, a measured A-B=C-D (as expressed on the Daily) suggests that a bottom could be in place at [1630/40].” The rebound has ensued, with the alternative safe haven rallying up to 1690 today. A daily close above 1700 points towards 1722/25 and 1755. Support is 1663 (breaking now) (200-EMA) and 1640/45.

--- 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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12 February 2013 13:10 GMT