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Japanese Yen Rally Raises the Threat Level of Intervention

Japanese Yen Rally Raises the Threat Level of Intervention

2012-01-31 02:29:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Struggles to Hold onto Monday Gains as Equities Shudder
  • Euro Hit Across the Board as Portugal, Greece, EU Summit Trigger Concern
  • Japanese Yen Rally Raises the Threat Level of Intervention
  • Swiss Franc: Will the SNB Wait Until EURCHF Hits 1.2000 to Act?
  • British Pound Sees Limited Reaction to Sentiment Survey, Follows Euro
  • New Zealand Dollar Following Risk for Now, But What Will Bollard’s Exit Mean?
  • Gold Rally Cools, Volume Slips after Biggest Swell in Months

Dollar Struggles to Hold onto Monday Gains as Equities Shudder

An opening drive for the US dollar Monday morning has helped to curb the automatic selling pressure that is sustained by a market following passive trends, but it doesn’t give us a definitive trend change. The greenback’s bounce to start the week fits the fundamental picture, yet we shouldn’t assume the masses have suddenly altered their views on stimulus support from the world’s policy authorities. From the greenback itself, there is little to define a changing tide: QE3 speculation is still in place, the 10-year yield is just off record lows and the session’s data (personal spending for December) didn’t feed the ‘unspoiled US economy’ view. What truly mattered was the S&P 500 and Dow Index corrections. We’ve seen evidence of exhaustion for some time, and the pullback threatened a catalyst. If equities pitch lower, the dollar will soar.

Euro Hit Across the Board as Portugal, Greece, EU Summit Trigger Concern

Downgrades to AAA-rated France and EFSF program, a blown deadline for a tangible Greek bond-swap deal and failed EU summits over the past few weeks failed to undermine the euro. And yet, the same general themes (without a particularly remarkable catalyst) led the shared currency to its first meaningful set back in over two weeks. Is there a specific trigger that was tripped at the start of this week? No. The difference between Monday and conditions over the past two weeks was risk trends. With a general ‘risk off’ run, it very difficult (nearly impossible) to overlook the troubles in the Euro-region. We should still watch the Greek bond-swap negotiations, the disappointing EU summits, the swell in the ECB balance sheet and other concerns; but the most pressing threat now is the surprising swell in fear that Portugal is the next Greece.

Japanese Yen Rally Raises the Threat Level of Intervention

It’s difficult to take warnings from Japanese Finance Minister Azumi and Bank of Japan Governor Shirakawa seriously, but we need to be on high alert for possible intervention from the Ministry of Finance or BoJ. The past 48 hours was riddled with warnings by policy officials that excessive yen appreciation would be met with action. Given the consistency of this threat (without credible action), it isn’t difficult to understand the skepticism. However, the market itself shouldn’t be viewed with such skepticism. While Azumi and Shirakawa will attempt to ‘talk their currency’ lower until it is significantly lower than current price, they won’t normally act unless the situation is considered dire. With Monday’s risk setback, we are reminded that a carry unwind alongside speculative deleveraging would spell significant bullish pressure for the funding currency. And, with intervention, there are two conditions that can incite action: record or near-record highs and volatility. After a three-day decline, USDJPY is dangerously close to its record low. Furthermore, the new focus for volatility – EURJPY – is at high risk of receiving a shock through sentiment connections or Euro fundamental troubles.

Swiss Franc: Will the SNB Wait Until EURCHF Hits 1.2000 to Act?

The threat is out there. The Swiss National Bank stated clearly back in September that they would fight any attempt to drive EURCHF below the 1.2000-floor that they defined as a hard floor. Yet, despite the warning, the pair has ticked off a steady slide to test the central bank’s resolve. Dipping as low as 1.2039 Monday, it seems the market may force the SNB’s hand. This is a difficult position to be in. Policy officials want to avoid manipulating the markets as straightforward intervention has proven itself too many times to be ineffective for various policy authorities over the years. Nevertheless, they have vowed the fight to protect exports and to abandon the effort now could open the tidal gates for Euro safe haven flows and speculative shorting. Furthermore, it would permanently damage the credibility of the SNB. What makes this even more troublesome, however, is the definable line in the sand (1.2000). If they wait for that level to be tagged, it could be too late. Safe haven flows (unconcerned with exchange rates) could meet a stop run that overwhelms the central bank. Watch out for a possible, dramatic SNB move.

British Pound Sees Limited Reaction to Sentiment Survey, Follows Euro

In general, the cable (GBPUSD) is a poor proxy for the sterling’s independent fundamental health. In this coupling, we are dealing with a pair that follows risk appetite trends as well as the echo of Euro fundamental issues. As such, it really shouldn’t surprise that Monday’s GBPUSD performance looked a lot like what EURUSD carved out – and an end to the most consistent bull run (10 consecutive days) in over a decade. When we evaluate the currency’s health against the spectrum of its liquid counterparts, we see a mixed bag. While we did have a fundamental offering in the form of the GfK Consumer Confidence survey (for January); this simply doesn’t have the necessary impact to offer a meaningful change to the trend towards recession and the drag caused by the Euro Zone connections.

New Zealand Dollar Following Risk for Now, But What Will Bollard’s Exit Mean?

Though it didn’t seem to make many top headlines – crowded out by a preoccupation with the side effects risk appetite trends – kiwi traders should take note of RBNZ Governor Bollard’s planned exit from the top monetary policy position in September. The central banker decided not to run for another 5-year stint of rate setting after an illustrious career as an ardent hawk and one of the most aggressive policymakers amongst the majors. Clearly, the ebb and flow of investor sentiment has a more immediate influence on New Zealand dollar price action; but we need to appreciate the changing of the guard at the central bank for a currency that is dependent on its investment (carry) status.

Gold Rally Cools, Volume Slips after Biggest Swell in Months

Gold finally took a breather Monday. Following a three-day, 4.1 percent rally, the precious metal notched a bearish close – though, adjusting for the gap up on the open, the slide was a mere $1.00 or 0.06 percent. There is still a latent correlation between underlying risk trends and gold which seems to defy the logical market position of the traditional safe haven. Yet, this unusual performance has more to do with the strength of the dollar – which juxtaposes both capital markets and gold. It is worth noting that in this remarkably tame slide, futures volume cooled significantly from the first three-day run of 320,000 contract turnover since August. That is a strong signal of support for the month-long, bull run. That said, if the greenback can gain traction; we will likely see gold pitch into a considerable retracement.

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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:01

GBP

GfK Consumer Confidence Survey (JAN)

-32

-33

Has shown pivot in report

0:30

AUD

NAB Business Confidence (DEC)

2

Confidence has improved on rate cut views

0:30

AUD

NAB Business Conditions (DEC)

1

0:30

AUD

Private Sector Credit (MoM) (DEC)

0.3%

0.3%

Credit stable, could support steady rate

0:30

AUD

Private Sector Credit (YoY) (DEC)

3.6%

3.5%

2:00

NZD

Money Supply M3 (YoY) (DEC)

6.5%

High growth may be of alarm

4:00

JPY

Vehicle Production (YoY) (DEC)

4.5%

Japanese heavy industrial data continues to decline, though more of a push for budgetary reforms than monetary

5:00

JPY

Annualized Housing Starts (DEC)

0.848M

0.845M

5:00

JPY

Housing Starts (YoY) (DEC)

-1.5%

-0.3%

5:00

JPY

Construction Orders (YoY) (DEC)

21.0%

5:00

JPY

Small Business Confidence (JAN)

45.6

7:00

EUR

German Retail Sales (YoY) (DEC)

0.9%

0.8%

Stronger sales could result in continued pause of rates

7:00

EUR

German Retail Sales (MoM) (DEC)

0.8%

-1.0%

7:00

CHF

UBS Consumption Indicator (DEC)

0.81%

Swiss economy moderate

8:55

EUR

German Unemployment Change (JAN)

-5K

-22K

Labor figures may not move markets much as focus remains on Greece

8:55

EUR

German Unemployment Rate s.a. (JAN)

6.8%

6.8%

9:00

EUR

Italian Unemployment Rate s.a. (DEC P)

8.7%

8.6%

Secondary data may not move

9:30

GBP

Mortgage Approvals (DEC)

54.0K

52.9K

Lending showing some signs of recovery, though King stands ready for further easing

9:30

GBP

Net Consumer Credit (DEC)

0.4B

0.4B

9:30

GBP

Net Lending Sec. on Dwellings (DEC)

0.8B

0.6B

9:30

GBP

M4 Ex OFCs 3M Annualised (DEC)

3.7%

Money supply grows steadily, not at the point of too-quick growth

9:30

GBP

M4 Money Supply (MoM) (DEC)

-0.6%

9:30

GBP

M4 Money Supply (YoY) (DEC)

-2.6%

10:00

EUR

Euro-Zone Unemployment Rate (DEC)

10.4%

10.3%

Overall rate led by peripherals

13:30

CAD

Gross Domestic Product (MoM) (NOV)

0.2%

0.0%

Expected higher on domestics

13:30

CAD

Industrial Product Price (MoM) (DEC)

0.2%

Industrial prices may fall on weaker commodity prices

13:30

CAD

Raw Materials Price Index (MoM) (DEC)

3.8%

13:30

USD

Employment Cost Index (4Q)

0.4%

0.3%

Growth may pick up pace after Fed’s promise

13:30

USD

Employment Cost Index (NOV)

2.7%

14:00

USD

S&P/CS 20 City s.a. (MoM) (NOV)

-0.4%

-0.6%

House prices continuing to fall could hurt construction sector

14:00

USD

S&P/Case-Shiller Composite-20 (YoY)

-3.2%

-3.4%

14:00

USD

S&P/Case-Shiller Home Price Index

140.3

14:45

USD

Chicago Purchasing Manager (JAN)

63

62.2

Secondary industries improving

15:00

USD

Consumer Confidence (JAN)

68

64.5

Confidence may improve

15:00

USD

NAPM-Milwaukee (JAN)

57.5

57.8

Manufacturing expected lower

22:30

AUD

AiG Performance of Manufacturing Index (JAN)

50.2

Australian sector near stalling

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

16.5000

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.9670

1.7863

7.8363

7.7571

1.2577

Spot

6.7449

5.6549

5.8154

Support 1

12.6000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.3317

1.5863

77.04

0.9289

1.0113

1.0742

0.8312

101.75

121.38

Resist. 2

1.3275

1.5826

76.87

0.9260

1.0089

1.0706

0.8283

101.41

121.04

Resist. 1

1.3232

1.5789

76.70

0.9230

1.0065

1.0669

0.8255

101.07

120.70

Spot

1.3146

1.5715

76.37

0.9170

1.0017

1.0597

0.8198

100.40

120.01

Support 1

1.3060

1.5641

76.04

0.9110

0.9969

1.0525

0.8141

99.73

119.33

Support 2

1.3017

1.5604

75.87

0.9080

0.9945

1.0488

0.8113

99.39

118.98

Support 3

1.2975

1.5567

75.70

0.9051

0.9921

1.0452

0.8084

99.05

118.64

v

--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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