Forex: Yen Rallies Post-BoJ - Strength Offers Opportunities to Sell
ASIA/EUROPE FOREX NEWS WRAP
I think I’m turning American, I really think so. That might be a slight alteration of what the song’s original lyrics are, but the Japanese are doubling down on fighting inflation by embracing ultra-dovish monetary policies up until recently only employed by the Federal Reserve. After two painstakingly long months of speculation, the Bank of Japan’s new stance is official: an aggressive +2.0% yearly inflation target to be reached “at the earliest possible time”; and a ¥13 trillion ($145 billion) per month in open-ended asset purchases beginning in 2014. While the Japanese Yen has reacted favorably to the news – a development we’ve been expecting to occur, as noted in this column for the past several weeks – we must consider the longer-term implications of the BoJ’s plan as to ascertain the validity of today’s Yen strength.
First and foremost, the market remains extremely short the Yen: the most recent CFTC’s COT report for the week ended January 15 shows that net non-commercial futures positions remain heavily skewed short, the shortest since July 2007 still. If investors needed a reason to take profits, now would be the time, with policy solidified. But beyond positioning, there is little reason to think that this is the Yen bottom (or AUDJPY, EURJPY, USDJPY, etc. topping). Although the BoJ’s asset purchase program doesn’t begin for another year, it is significantly more aggressive than the Fed’s program: $145B/month by the BoJ versus $85B/month by the Fed. Thus, the BoJ is doing its best impersonation of the Fed – by one-upping it.
But the BoJ and the Fed aren’t the only central banks actively trying to devalue their currency: the European Central Bank, the Bank of England, and the Swiss National Bank have all implemented policies similar to those of the BoJ and the Fed. If all of the major players are trying to devalue their currencies, we should thus expect other policies (like a 0.00% main rate) and new management at the BoJ (Governor Shirakawa’s term ends at the end of the quarter) to push the Yen down further.
Taking a look at European credit, peripheral yields are lower, helping lift the Euro on Tuesday. The Italian 2-year note yield has decreased to 1.416% (-2.3-bps) while the Spanish 2-year note yield has decreased to 2.492% (-3.8-bps). Similarly, the Italian 10-year note yield has decreased to 4.191% (-2.4-bps) while the Spanish 10-year note yield has increased to 5.111% (-2.5-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 11:45 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.48% (+0.17% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: No change: “the RSI downtrend that was broken last week was the clue for further strength. Accordingly, I maintain that “focus is on buying dips.” It now appears that a Bull Flag has formed on the daily chart, with a break above 1.3400/10 signaling a move towards 1.3485. 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), 1.3400/10 and 1.3485 (late-February swing high).
USDJPY: The past few weeks I’ve maintained: “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)).” This is playing out today, with the Yen as the top performer. Resistance comes at 89.10/35, 89.60/70 and 90.10/30 (monthly R2). Support comes in at 88.40 (monthly R1) and 87.00/40 (weekly pivot).
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).”
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.
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.
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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