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Sterling Falls on Weak Manufacturing Data; Yen Rebounds on Iwata Rumor

Sterling Falls on Weak Manufacturing Data; Yen Rebounds on Iwata Rumor

Christopher Vecchio, CFA, Senior Strategist


Early week jitters have returned among traders shorting the Japanese Yen, as it appears that Prime Minister Shinzo Abe’s nest of policymakers at the Bank of Japan might have one fewer dove. Opposition party DPJ will oppose the nomination of Kikuo Iwata for the deputy governorship, according to reports. Mr. Iwata is considered an arch-dove like incoming governor Haruhiko Kuroda, quoted as saying that he firmly believes in a massive balance sheet expansion encompassing purchases of government to fight inflation. Needless to say, Mr. Iwata’s stance entails a weaker Yen; thus, the news of him potentially not being as part of the BoJ’s new policy committee has provoked some short covering overnight.

In Europe, there are two main storylines today, one for the British Pound, and the other for the Euro. For the world’s oldest currency, focus is on the continuing deterioration of the economy, with both the Industrial Production (JAN) and Manufacturing Production (JAN) reports showing significantly steeper contractions than forecasted, as well as a markedly softer revision to prior figures. Between Bank of England policy firmly on hold right now – the key interest rate is tethered to 0.50%, and the Asset Purchase Target is stuck at £375B – and the Chancellor of the Exchequer continuing austerity, the UK economy is poised for further stagnation as recessionary growth conditions persist.

On the Euro-front, a Spanish bond auction went better than expected, with clamoring investors buying €5.83B of 6- and 12-month securities, neatly above the upper goal of €5.50B sales. Likewise, the results were pleasantly surprising: the 6-month bills were sold at an average yield of 0.794%, down from 0.859% in mid-February; and the 12-month bills sold at an average yield of 1.363%, down from 1.548%. It seems investors are gearing up for a potential European Central Bank foray into the bond markets.

Taking a look at European credit, peripheral yields are mostly lower on the back of the positive Spanish bond auction. The Italian 2-year note yield has decreased to 1.744% (-2.7-bps) while the Spanish 2-year note yield has increased to 2.172% (+0.2-bps). Similarly, the Italian 10-year note yield has decreased to 4.607% (-2.1-bps) while the Spanish 10-year note yield has decreased to 4.697% (-4.3-bps); lower yields imply higher prices.


JPY: +0.52%

AUD: +0.17%

CHF: -0.06%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.11% (+0.96% past 5-days)


There are no significant events on the economic calendar for the US trading session on Monday.

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


Sterling_Falls_on_Weak_Manufacturing_Data_Yen_Rebounds_on_Iwata_Rumor_body_Picture_6.png, Sterling Falls on Weak Manufacturing Data; Yen Rebounds on Iwata Rumor

EURUSD: No change: “Although the move higher was cued by the breakout in RSI a few days ago, the NFP print could derail the uptrend with ease…Certainly, this proved to be the case, with the reversal on Thursday completely reversed on Friday. I will continue to respect the downtrend off of the February 1 and February 13 highs, though remain open to a bullish outcome: a Falling Wedge (reversal pattern).” Resistance is at 1.3040/50 (8-EMA), 1.3080/100, and 1.3140/50 (21-EMA). Support comes in at 1.2950/70 and 1.2870/85. Note: an Inside Day is forming today after an Inside Day yesterday; clearly, indecision exists here.

Sterling_Falls_on_Weak_Manufacturing_Data_Yen_Rebounds_on_Iwata_Rumor_body_Picture_5.png, Sterling Falls on Weak Manufacturing Data; Yen Rebounds on Iwata Rumor

USDJPY: No change: “The USDJPY has set fresh highs for the year, as the RSI breakout on 2/28 was the cue for further strength. As US equity markets have hit fresh all-time nominal highs, the USDJPY finally confirmed, on the back of a widening 2s10s Treasury spread (exactly what I’ve been waiting for). Accordingly, the Bull Flag consolidation now points towards 97.70 as the next key area higher…Progress has been made towards this target, although with an Inside Day forming, it is possible we could see some consolidation/downside price action before the move higher.” Downside pressure has been prevalent on Tuesday, with a false move higher after yesterday’s Inside Day, and now a Bearish Piercing Candle may be forming.

Sterling_Falls_on_Weak_Manufacturing_Data_Yen_Rebounds_on_Iwata_Rumor_body_Picture_4.png, Sterling Falls on Weak Manufacturing Data; Yen Rebounds on Iwata Rumor

GBPUSD: No change: “With the ascending trendline off of the 2009 and 2010 lows breaking, as well as the 2010 to 2013 range bottom lows breaking near 1.5300, my bias is to sell rallies. Like the EURUSD, the GBPUSD is consolidating just near its 2013 lows, but has failed at its 8-EMA as it has for the past several weeks, suggesting that the next leg lower may be on the verge of occurring…Another failed run at the 8-EMA late last week has pushed the GBPUSD towards new yearly lows, with the first major support coming in at 1.4780/800 (March 2010 swing lows).”

Sterling_Falls_on_Weak_Manufacturing_Data_Yen_Rebounds_on_Iwata_Rumor_body_Picture_3.png, Sterling Falls on Weak Manufacturing Data; Yen Rebounds on Iwata Rumor

AUDUSD:Yesterday I said: “The daily RSI remains capped below 50, as it has been during the duration of the downtrend…a break of this RSI barrier, and a daily close above 1.0230/50 would negate the near-term bearish bias. The next level to look higher towards would be 1.0340/80 (mid-February swing highs); a continuation lower eyes a move towards 1.0090/1.0120, then 1.0000…The first reported RSI break was a fake out, as it has held below 50 while the downtrend off of the January 22 and February 20 highs has been maintained. Still, with consolidation above the March low, a close above 1.0230/50 today would shift near-term focus towards 1.0340/80.” The daily RSI has confirmed the near-term move higher towards 1.0340/80; failure would put the lows back in focus. A break of 1.0340/80 points to 1.0460/80.

Sterling_Falls_on_Weak_Manufacturing_Data_Yen_Rebounds_on_Iwata_Rumor_body_Picture_2.png, Sterling Falls on Weak Manufacturing Data; Yen Rebounds on Iwata Rumor

S&P 500: No change: “The near-term set back at 1530 took place for less than two weeks, but the break higher hasn’t been marked by high volume; no, it has been a volumeless rally, with the breakout occurring on volumes around 80% of the daily average in 2013. This is not a ‘technically strong move.’ The float higher could continue, towards the all-time high at 1576.1, but might be cut short in the 1565/70 zone, where two key Fibonacci extensions lay. I’m very skeptical up here – markets seem to be ignoring Italy and the derisive politics in the United States at the moment (this also happened in 2011 and 2012 at the beginning of those years).”

Sterling_Falls_on_Weak_Manufacturing_Data_Yen_Rebounds_on_Iwata_Rumor_body_Picture_1.png, Sterling Falls on Weak Manufacturing Data; Yen Rebounds on Iwata Rumor

GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”

--- Written by Christopher Vecchio, Currency Analyst

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