Yen Crawls Higher with G20 Meeting in Focus; Sterling Slide Continues
ASIA/EUROPE FOREX NEWS WRAP
FX markets have been more or less paralyzed thus far on Friday, as investors across the globe await word from the G20 meetings in Moscow, Russia, about potential actions taking towards countries offering up aggressive policy stances towards their currencies. Cutting through the muck, this essentially means that nations will take a harder stance on Japan’s Yen-debasement policy, which has been used to help the Japanese economy “reflate.”
This brings into question the viability of the condemnation that is expected; of course, over the years, we’ve heard on numerous occasions that ‘exchange rates are determined by market forces’ and that ‘any policies explicitly implemented to devalue a currency are highly frowned upon.’ If the G20 statement is in line with what the G7 said – that targeting exchange rates (cough cough, Japan) should not be a policy – I would expect a significant pullback in the Yen-crosses (AUDJPY, EURJPY, USDJPY, etc., lower). However, because of how feeble this potential G7/G20 stance is, any near-term strength in the Yen is a good opportunity to sell, in my opinion: the Yen and the Nikkei 225 have moved inversely the past few months; and this past weekend, Japanese officials were quoted as saying that they’re targeting 13000 in the Nikkei 225 by the end of March. The Nikkei 225 is at 11173.83 presently; this would necessarily suggest that if this target were to be reached, the Yen would have to weaken even further.
Elsewhere, the British Pound remains horribly weak as yet another data print comes across as severely negative. Retail Sales unexpectedly contracted in January, further underscoring the notion that another year of austerity is going to hurt the economy. Considering consumption accounts for roughly 62-65% of UK GDP, any continued weakness in Retail Sales will hurt the Sterling even further.
Taking a look at European credit, peripheral yields have continued to fall, though the Euro remains disconnected. The Italian 2-year note yield has fallen to 1.531% (-2.1-bps) while the Spanish 2-year note yield has decreased to 2.473% (-1.5-bps). Likewise, the Italian 10-year note yield has decreased to 4.358% (-3.7-bps) while the Spanish 10-year note yield has increased to 5.186% (+0.6-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 11:55 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.04% (+0.28 % past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: Maintaining the same bias as the move to 1.3280/300 has yet to be completed: “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.”
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).
GBPUSD: The pair is reaching overextended levels to the downside on the 4H timeframe, as the GBPUSD slid to under 1.5500 today for the first time since August. With the pair now having fallen by over -800-pips since the first trading day of the year, it could be time to take profit.A rally back into 1.5750/800 shouldn’t be ruled out before a move towards 1.5265/70, the June low. Resistance comes in at 1.5570/80 (monthly S1) and 1.5675. Support is 1.5480/500 and 1.5380.
AUDUSD:Tuesday I said: “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.” Although there was an overshoot into 1.0360, former support, failure has occurred, signaling further downside is possible. Price has struggled further to overcome this level. I’m still looking for a move into 1.0135/75.
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.
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].” A daily close above 1700 points towards 1722/25 and 1755. Support is 1640/45 and 1625/35.
--- Written by Christopher Vecchio, Currency Analyst
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