Japanese Warnings of Intervention Finally See Follow Through
- MOF steps in and intervenes in Yen market
- Talk of QE3 gaining momentum and helping to prop sentiment
- Key event risk due in the form of ECB and BOE rate decisions
- Intervention prospects increasing with rhetoric heating up
- Gold ignores overbought technicals and trades just off record highs
We had already seen the SNB step up on Wednesday by lowering rates and implementing various other measures to curb the appreciation in the Franc, and today it was Japan’s turn, with the government stepping in and intervening on behalf of the Yen through the sale of an unspecified amount of the local currency. There had been an intensified effort in recent sessions to ramp up warnings of a sizeable currency intervention, and we could finally be seeing this play out with Usd/Jpy surging by over 200 points thus far in early Thursday trade. Officials in Japan have conceded that if such measures are to be taken, they will need to be substantial if they are going to have any lasting impact. We therefore would not at all be surprised to see a consistent effort of official Yen selling over the coming days.
This takes us to the point we had been making in our report in the previous day in which we highlighted the fact that there are now very few safe haven currency plays, with both the Yen and Swiss Franc pulling back from record levels on intervention, and the US Dollar at risk of yet another sell-off as talk of additional accommodation measures make the rounds. The clear winner in all of this is undoubtedly gold, with the yellow metal emerging as the primary beneficiary of the flight to safety flows. We do however contend that if one currency is to benefit going forward from risk liquidation, it is likely to be the buck. While both the Franc and Yen are clearly overextended, the USD is relatively undervalued and could therefore be a solid play.
Market sentiment has picked up marginally heading into Thursday trade, with the lift in risk appetite ironically coming from what we believe to be an even more market worrying prospect. Talk of yet another round of Fed monetary easing in the form of QE3 has been gaining traction, and although the implementation of such measures would confirm just how bad things really are, the idea of additional simulative measures continues to have an uplifting influence on overall sentiment. At this point however, we are not convinced that the Fed would pursue such measures unless absolutely necessary, with the risks of another round of accommodation bringing severe longer-term negative consequences.
Aside from the latest intervention, the main focus over the coming sessions will be on any developments relating to Eurozone and US structural and debt concerns, while event risk in the form of the ECB and BOE central bank rate decisions and economic readings out of the US will also play a role in influencing price action.
The central bank event risk mentioned above is not due until early in the North American session, and the economic calendar for European trade is rather light. However, we would recommend paying attention to German factory orders, with the data perhaps taking on a little more meaning given the fragility of the Eurozone economy. US equities and crude oil are recovering a bit, while gold continues to ignore overbought technical studies, tracking just off its fresh record highs.
EUR/USD: The market continues to adhere to a bearish sequence of lower tops since May, with a fresh lower top now likely in place by 1.4535 ahead of the next downside extension back towards and eventually below 1.4000. In the interim, look for any intraday rallies to be well capped ahead of 1.4450, while back under 1.4140 should accelerate declines. Ultimately, only above 1.4535 would negate outlook and give reason for pause.
USD/JPY: Setbacks have stalled out just ahead of the 76.25 record lows from March, with the market dropping to 76.30 ahead of the latest sharp reversal. The bounce is somewhat significant on a short-term basis, with the market showing just how well it is supported down by 76.00. Given that we are seeing the rate by record lows, we would not at all be surprised to see the formation of a material base in favor of significant upside back towards the 82.00 area over the coming sessions. Thursday’s surge back through 78.00 confirms bias and should accelerate. In the interim, any intraday setbacks should now be well supported above 77.00.
GBP/USD: Despite the latest rally back above 1.6400, the market still remains locked in a broader downtrend off of the April highs, and a fresh lower top is now sought out somewhere ahead of 1.6550 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a break back above 1.6550 would delay bearish outlook and give reason for pause, while back under 1.6220 should accelerate declines.
USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows by 0.7600, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. Still, at this point, fading this trend will require some upside confirmation and we would look for a break back above 0.7860 at a minimum to open the door for these reversal prospects and alleviate immediate downside pressures.
Written by Joel Kruger, Technical Currency Strategist
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