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US Dollar Surges After BoJ Easing; European Currencies Lower Overall

US Dollar Surges After BoJ Easing; European Currencies Lower Overall

2013-04-04 11:30:00
Christopher Vecchio, CFA, Senior Strategist


The Bank of Japan, under the watchful eye of Haruhiko Kuroda, has already made big waves at its first policy meeting. The central bank announced that it would step up its asset purchase pace to ¥7 trillion/month, well-above the consensus provided by Bloomberg News of ¥5.2 trillion/month, while simultaneously removing a cap on some bond holdings and a limit on debt maturities. Alongside the promise to reach its +2.0% y/y inflation target within two years, the BoJ came out swinging hard, and by a look at price action, scored a true ‘knockout.’

Let’s not fret: the BoJ’s shift to a very aggressive easing stance is a watershed moment, as it shows a material shift in thinking about policymakers. Mainly, this has to do with the curious timing of the rate decision: Governor Kuroda and his cohorts were only confirmed up to April 8 as former head Masaaki Shirakawa stepped down early on March 19. As a result of this quirk, I was expecting the BoJ to be softer at their first conclave under Kuroda; instead, we got nothing short of an impressive result.

Ahead of the Bank of England and European Central Bank rate decisions, the downward pressure on the Japanese Yen has stoked significant demand for the US Dollar; the British Pound and the Euro are trading slightly lower on the day as a result. While nothing is expected at either the BoE or ECB meetings, the outcomes could be very different: no change at the BoE could provoke a stronger Sterling; whereas a hold by the ECB could weaken the Euro. In both cases, dovish undertones are likely to remain omnipresent given the weak economic backdrops currently encompassing each economic region.

Taking a look at European credit, lower peripheral yields are having little positive influence on the Euro on Thursday. The Italian 2-year note yield has decreased to 1.543% (-10.2-bps) while the Spanish 2-year note yield has decreased to 2.079% (-8.1-bps). Likewise, the Italian 10-year note yield has decreased to 4.517% (-6.0-bps) while the Spanish 10-year note yield has decreased to 4.857% (-3.6-bps); lower yields imply higher prices.


CAD: -0.04%

EUR: -0.33%

CHF: -0.43%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.80% (+0.47%past 5-days)


US_Dollar_Surges_After_BoJ_Easing_European_Currencies_Lower_Overall_body_Picture_7.png, US Dollar Surges After BoJ Easing; European Currencies Lower Overall

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US_Dollar_Surges_After_BoJ_Easing_European_Currencies_Lower_Overall_body_Picture_6.png, US Dollar Surges After BoJ Easing; European Currencies Lower Overall

EURUSD: I maintain: “As I do not find the bailout terms favorable to long-lasting Euro strength, the “top” after the bailout could now be in place. Fresh yearly lows were set below 1.2800 at the time of writing [last Wednesday], with a clear test of 1.2660/80 (61.8% Fibonacci retracement on July 2012 to February 2013 rally, mid-November swing lows) in focus. A bearish bias holds so long as 1.3025 holds this week.” A Bear Flag may have formed on the daily chart against 1.2880, pointing to a move lower to 1.2660/80.

US_Dollar_Surges_After_BoJ_Easing_European_Currencies_Lower_Overall_body_Picture_5.png, US Dollar Surges After BoJ Easing; European Currencies Lower Overall

USDJPY: The sell-off may be over now that the BoJ has jumped the gun and increased its asset purchase program. The USDJPY cleared the descending trendline off of the March 12 and March 20 highs, at 95.00/15. Topside risks are now in play, with 96.00/20 eyed to the upside, followed by 96.60/80 and 97.60/80. Support comes in at 94.20 and 92.50/75.

US_Dollar_Surges_After_BoJ_Easing_European_Currencies_Lower_Overall_body_Picture_4.png, US Dollar Surges After BoJ Easing; European Currencies Lower Overall

GBPUSD: Last week I said: “The failed run up to the 1.5285/375 region suggests that the rally in the GBPUSD seen the past few weeks may be nothing more than short covering and asset reallocation, rather than traders taking up new positions amid an improved interest rate outlook for the UK. Price has fallen back below the 8- and 21-EMAs after a rejection at a critical RSI level of 55…A potential Bearish Rising Wedge has developed (clearer on the 4H timeframe, which would suggest a retest of the lows near 1.4830. The pattern is valid so long as 1.5260/65 holds to the upside.” Price has moved lower, initiating both the Double Top and Bearish Rising Wedge patterns.

US_Dollar_Surges_After_BoJ_Easing_European_Currencies_Lower_Overall_body_Picture_3.png, US Dollar Surges After BoJ Easing; European Currencies Lower Overall

AUDUSD:Early last week I said: “The AUDUSD uptrend remains, but after rejection in the critical 1.0475/535 region, the uptrend is being tested at 1.0435,” then on Thursday, “Now that price has closed below 1.0435, a further pullback to 1.0370/95 is in scope before buying interest returns.” Price fell to 1.0385 – my target zone – and rebounded firmly back to the 1.0475/535 zone. Failure here would initiate a Double Top pattern, pointing to a retest of 1.0250/75. A break of 1.0475/535 points to 1.0600/35 higher.

US_Dollar_Surges_After_BoJ_Easing_European_Currencies_Lower_Overall_body_Picture_2.png, US Dollar Surges After BoJ Easing; European Currencies Lower Overall

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).”

US_Dollar_Surges_After_BoJ_Easing_European_Currencies_Lower_Overall_body_Picture_1.png, US Dollar Surges After BoJ Easing; European Currencies Lower Overall

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

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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