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Forex: Yen Rebounds as BoJ Convenes - First Major Test for Abe

Forex: Yen Rebounds as BoJ Convenes - First Major Test for Abe

Christopher Vecchio, CFA, Senior Strategist


After two months of rampant speculation, promises from an overzealous challenger, a surprisingly biased election result, and an endless supply of hostile dovish commentary, Japanese policymakers are convening for what should be the most important central bank policy meeting of the 1H’13.

Given the transparency surrounding this meeting – its almost as if Japanese Prime Minister Shinzo Abe wanted to scare the market into front-running his policies so the Yen would weaken sooner – there is a strong possibility that this is a typical “buy the rumor, sell the news” event, like other watershed moments in FX over the past few months: the horrible May NFP report on June 1, after which the US Dollar topped and equity markets bottomed within one day; the September ECB Rate Decision that produced the OMTs program, after which the Euro topped within one week; and the September Fed Rate Decision that produced QE3, after which the US Dollar bottomed the day after.

Accordingly, I am looking for similar price action – the Japanese Yen bottoming, or Yen-crosses (AUDJPY, EURJPY, USDJPY, etc.) topping – over the coming days, as long as expectations are not only met, but any upside potential is capped on by a lack of enthusiasm. There are two significant measures that are almost assured to be implemented: a +2.0% yearly CPI target; and a ¥10 trillion asset purchases expansion. Fringe measures that could provoke additional Yen weakness (that aren’t priced in): a cut in the main rate from 0.10% to 0.00%; a ¥15 trillion asset purchases expansion or greater; or a provision that means easing is open ended.

Taking a look at European credit, peripheral yields are slightly higher, weighing on the Euro on Monday. The Italian 2-year note yield has increased to 1.398% (+3.3-bps) while the Spanish 2-year note yield has increased to 2.492% (+4.5-bps). Likewise, the Italian 10-year note yield has increased to 4.172% (+1.5-bps) while the Spanish 10-year note yield has increased to 5.077% (+3.4-bps); higher yields imply lower prices.


JPY: +0.72%

CHF: +0.24%

GBP: +0.09%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.26% (+0.51% past 5-days)


There are no significant events on the docket during the US trading session today.

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


Forex_Yen_Rebounds_as_BoJ_Convenes_First_Major_Test_for_Abe_body_Picture_6.png, Forex: Yen Rebounds as BoJ Convenes - First Major Test for Abe

EURUSD: No change: “With no follow through below 1.3280, bulls have been reinvigorated at the former May highs. Accordingly, the RSI downtrend that was broken last week was the clue for further strength. Accordingly, I maintain that “focus is on buying dips.” This remains to be the case even as price has started to catch up to momentum. Support comes in 1.3280/3310, 1.3120/45, 1.3090/95 (50-EMA), and 1.3000 (January low). Resistance is 1.3380/85 (mid-March swing high) and 1.3485 (late-February swing high).”

Forex_Yen_Rebounds_as_BoJ_Convenes_First_Major_Test_for_Abe_body_Picture_5.png, Forex: Yen Rebounds as BoJ Convenes - First Major Test for Abe

USDJPY: No change: “The pair’s rally has continued to its highest level since June 2010, essentially leaving the door open for a run above 90.00. Given BoJ policy, any dips seen in the USDJPY are viewed as constructive for further bullish price action (though I would like to clarify that this view is only valid until the BoJ meeting on January 22; the market remains very net-short the JPY, so a near-term top marked by an event seems possible (think the US Dollar bottoming the day after QE3 was announced)). Resistance comes at 89.10/35 (breaking now) (weekly R1), 89.60/70 (weekly high) and 90.10/15 (monthly R2). Support comes in at 88.40 (monthly R1) and 87.00/40 (weekly pivot).”

Forex_Yen_Rebounds_as_BoJ_Convenes_First_Major_Test_for_Abe_body_Picture_4.png, Forex: Yen Rebounds as BoJ Convenes - First Major Test for Abe

GBPUSD: No change as the pair steadies below its 200-DMA: “The pair has broken below ascending TL support off of the July and November lows at 1.6000. A weekly close below this level could accelerate losses through 1.5900/05 (200-DMA) towards the most recent swing low, at 1.5820/25 set in mid-November. Support is 1.5750 and 1.5825. Resistance comes in at 1.5900/10, 1.6000/10, 1.6070/75 (50-EMA), 1.6180, and 1.6300/10 (post-QE3 announcement high in mid-September).

Forex_Yen_Rebounds_as_BoJ_Convenes_First_Major_Test_for_Abe_body_Picture_3.png, Forex: Yen Rebounds as BoJ Convenes - First Major Test for Abe

AUDUSD:No change: “The pair has broken the December highs and a break signals a push towards 1.0605/25. However, it’s worth noting that the daily RSI hasn’t pushed into overbought territory on any rally since February 2012. Accordingly, we’ll either see a move to new highs and with RSI confirming the breakout; or further consolidation/pullback is in order before the next leg higher. Support is at 1.0530/50 (weekly pivot, monthly R1), 1.0465/70 (weekly S1), and 1.0400/05 (weekly S2). Resistance is 1.0530/85 and 1.0605/25 (August and September highs).” It should be added that a weekly close below 1.0530 could signal a deeper retracement towards 1.0350/400.

Forex_Yen_Rebounds_as_BoJ_Convenes_First_Major_Test_for_Abe_body_Picture_2.png, Forex: Yen Rebounds as BoJ Convenes - First Major Test for Abe

S&P 500: Earlier last week I said: “The S&P 500is back above a very significant zone of 1445/50 (descending trendline off of September and October highs, 100% Fibonacci extension off of the November 16 low, the November 23 high, and the November 28 low extension), and a move higher necessarily points to 1470/75…Bull Flag is potentially forming on lower timeframes (1H, 4H).” With these levels to the upside breaking, a move above the September highs points to resistance at the 161.8% Fibonacci extension at 1492, 1500 and 1520/25 (December 2007 high). Support comes in at 1470/75, 1450/55, 1425, and 1400.

Forex_Yen_Rebounds_as_BoJ_Convenes_First_Major_Test_for_Abe_body_Picture_1.png, Forex: Yen Rebounds as BoJ Convenes - First Major Test for Abe

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 1675 (20-EMA) and 1640/45.

--- Written by Christopher Vecchio, Currency Analyst

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