Major Dislocation for AUD, NZD, JPY after BoJ Holds; EUR/JPY Under ¥129
ASIA/EUROPE FOREX NEWS WRAP
A quick at the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) and one would be led to believe that risk appetite has slightly improved overnight and the past five days – losses of -0.14% and -0.66% respectively. Using a bit of FX-styled Dupont analysis on the USDOLLAR, and we can see which individual currencies are having the greatest impact on the headline; and it’s clear that the meager overnight loss does not fully encapsulate what’s transpired the past 24-hours.
The Australian and New Zealand Dollars have been absolutely pummeled again, falling by over -1.25% each against the US Dollar and over -3.00% each against the Japanese Yen. At present time, the AUDUSD is at its lowest exchange rate since September 2010, while the NZDUSD is at its lowest rate in 52-weeks. Similarly, the AUDJPY has retraced all of its gains in 2013, while the NZDJPY has receded to its lowest level since late-February.
Aside from the highly-vaunted global commodity supercycle that is continuing to be unwound, the main catalyst overnight was, of course, the Bank of Japan Rate Decision. Yesterday, while discussing the recently revised higher 1Q’13 GDP figures, I said “the stronger growth figures serve as an endorsement of ‘Abenomics’ – the policy that has lifted Japanese equities, sunk the Yen, and provoked excessive volatility in JGBs.” For now, the BoJ seems to be latching on to that view, and as per last night’s meeting, decided to stand firmly pat on their policy: no measures to extend easy money to banks via a 1-, 2-, or even 3-year funding supply operation; no implementation of negative deposit rates. (As Marc Chandler of BBH points out, these measures would equate to an LTRO-type operation). Now, the USDJPY is having its worst day in over three years (again), the Nikkei 225 is down, JGB yields are up, and FX markets are a mess.
Taking a look at European credit, the massive EURJPY unwind overnight (as great as -2.42% from high to low) has put significant pressure on peripheral bonds. The Italian 2-year note yield has increased to 1.704% (+11.4-bps) while the Spanish 2-year note yield has increased to 2.136% (+11.0-bps). Likewise, the Italian 10-year note yield has increased to 4.417% (+13.0-bps) while the Spanish 10-year note yield has increased to 4.697% (+12.4-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:30 GMT
There is no significant economic data on the calendar during the North American trading session on Tuesday, June 11.
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: No change: “With daily RSI divergence presenting itself dating back to the yearly high set in February, the EURUSD is facing resistance at 1.3300/20 (late-February swing high post-Italian election, 23.6% Fibonacci retracement on Jul’12 low to Feb’13 high). At this point in time, I still favor a bullish bias, but there is evidence of overextension in the near-term given 1H and 4H RSI divergence. Now, the bigger pattern (Head & Shoulders) is in conflict with momentum (8-EMA>21-EMA>200-SMA); I prefer to stay neutral.”
USDJPY: Yesterday I said: “Fundamental risk: the BoJ meets tonight and it is unlikely they announce major new measures or implement some type of support structure to anchor JGB volatility. I favor weakness after the US session close today.” The USDJPY fell by -2.67% from high to low overnight, and is now back near the ¥97.00 level after the BoJ did indeed hold last night. The failure to achieve the 50% retracement of the selloff from the May 22 to the June 7 low at 99.35 bodes poorly (99.28 reached and rejected), and with US Treasury yields at their highest level in 16-months and the USDJPY sinking, there is probably trouble ahead (I don’t think Fed begins QE3 taper in June; thus yields fall as bond prices move up, weighing on USDJPY). Levels to watch to the upside – 97.70, 98.60, 99.25/35; levels to watch to the downside – 96.50, 95.90, 95.00.
GBPUSD: No change from Friday: “Indeed, the pair has rallied to the 200-SMA at 1.5700 before reversing, and finds itself holding near early-May highs, as well as the 50% Fibonacci retracement of the January high to March low, at 1.5585. Similarly, the pair found resistance at the top rail of the ascending channel off of the March and May lows (drawn to the early-May high); and in context of the daily RSI failing at 66 again. A near-term top may be forming, but it’s best to be neutral in my opinion.”
AUDUSD: No change: “Rebounds have been shallow below the ascending trendline off of the October 2011 and June 2012 lows, suggesting that a top in the pair is in place, going back to the July 2011 high at $1.1071. Although there was some upside in the middle of last week, the AUDUSD once again finds itself down at new lows after a bounce, and price has fallen back to the 50% Fibonacci retracement from the May 2010 low to the July 2011 high, at 0.9572, and searching for a base near the October 2011 low at 0.9385/90. Despite excessive downside weakness, retail traders remain long, suggesting that a break below 0.9385/90 – in what would also be a break below major lows set a year ago this past week – could see 0.9380/90 and 0.9210/20 eyed lower.”
S&P 500: No change: “The S&P 500 found support ahead of the 61.8% Fibonacci retracement of the April swing low to May swing high (1593.6) on Thursday, and following the better NFP print, and closed the week above the conflux of the 8-/21-EMA at 1630/33. Now price faces a new challenge: the 61.8% Fibonacci retracement of the decline from the May high to the low on Thursday at 1653. A daily close here opens the door for a run back at the yearly high of 1687.4.”
GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.”
--- Written by Christopher Vecchio, Currency Analyst
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