Forex - Democratic Party of Japan Wins in a Landslide & JPY Advances

Forex News and Events: The week has started out pretty much how we had expected, with indecisiveness being the best description. With the UK on a banking holiday, European trading has grounded to a halt. Asian trading had a rough start, with Shanghai index continuing its free fall, dropping -6.74%. As was expected, the opposition Democratic Party of Japan posted a landslide victory in this weekend’s lower house race. While the win was historic as the DPJ will be only the second non-LDP government in 50 years, the effect on the FX markets was limited (and we expect short lived). Pre-election markets were optimistic that a change on power could lead to structural changes in Japanese politics and family oriented policies, leading to a knee jerk reaction in the JPY. The USDJPY dropped from 93.50 to 92.55, while the EURJPY briefly penetrated the 132.30 horizontal support. As with any elections, the Democratic campaign trail promises need to be slightly discounted, since politicians, regardless of nationality, will say just about anything to get elected and the actual financing of spending promises might be difficult given Japan’s massive current debt to GDP ratio. In the longer run, it’s uncertain, should the DPL actually live up to campaign promises, that the additional spending will boost consumer spending or just end up in savings accounts providing no real life to growth. However, we have our doubts on the proposed policy effectiveness and expect overall the election will prove to be JPY negative. Perhaps the most interesting aspect of last week’s trading was the subtle shifting of correlation between USD index and global MSCI index from a clear negative to slightly neg. This shift potentially supports our view that FX trading will begin to be influenced by global growth differentials over the risk aversion trade in the mid-term. This week contains a wealth of second tier economic releases, which, combined with low volumes, will produce range bound trading (punctuated by exaggerated volatility). Perhaps the most interesting event, before Friday’s NFP, should be the Australian RBA rate decision followed by Q2’s GDP. Markets have been very hawkish, expecting roughly 16bp of hikes for the Oct meeting and will be watching to see if the RBA is on the same page. We believe the RBA is still in data watching mode and will temper the markets expectations, which should weigh on the AUD. While the GDP data is backwards looking it will give us a good look into the moment the Australian economy had the fiscal stimulus tapper off. Should the figure print higher than expected it would easily negate the RBA’s attempt to reign in a rate hike speculations a day earlier. Technical Note: EURJPY- Very similar picture on EUR JPY to the USD JPY, whereby we are testing the very last medium term uptrend channel at 132.10. We discussed last week that a break below these levels would likely indicate the start of a major wave 3 downwards in both risk pairs and equities. For now expect a bounce off of these levels, as highlighted in todays report and a battle to commence between 132.10 and 134.85

Today's Key Issues (time in GMT): 00:00 GBP UK Bank holiday 08:00 NOK Retail sales, % m/m Jul (-0.4)1.5 exp, - 2.4 (-1.3) prior 09:00 EUR "Flash" HICP, % y/yAug-0.3 exp, -0.7 prior 12:00 ZAR Trade Balance, bn (Rand)Jul 3.2 prior 12:00 Brazil Industrial production, % y/y Jul -10.0 exp, -10.9 prior 13:45 USD Chicago purchasing managers index Aug 47.2exp, 43.4 prior 14:00 TRY Trade Balance, bn $Jul -4.2 exp

The Risk Today: EurUsd We spoke on Friday about slightly higher highs and higher lows being printed in this sideways rangebound action. 1.4380 has become the new upper end of this consolidation phase and 1.4240 as a low today would start skewing the picture towards testing the 1.4445 major resistance. Currently trading at a low of 1.4265 this morning, the 60 minute stochastics and RSI are both oversold, therefore supporting a possible turnaround between here and 1.4240 GbpUsd The support confirmed on Friday at 1.6190 continues to hold firm and the resistance at 1.6380, tested twice Friday afternoon, continues to be a major resistance. Needless to say the trend continues to be down so a break of the 1.6190 support targets 1.6078 and 1.5947 thereafter. Expect more shorting at 1.6380 and 1.6435 should we reach there. UsdJpy A second visit to the uptrend channel at 93.00 on Friday saw absolutely no support and the pair is now heading to test the last of the 10 month uptrend channels at 92.24. There is one final support below that at 91.80 but a break of both of these levels will put the long term downtrends back in full play and all time frames thereafter will be bearish for the pair. 93.40 has now become decent resistance and the ceiling for the short term downtrend. This would be the hurdle to clear to change such a strong picture for the Yen and to signal a return to some appetite for risk UsdChf Looking at a magnified picture of the descending triangle, one can see two easy levels to trade for the short term with longs taking positions at 1.0556 and shorts playing the downtrend at 1.0765. Triangles give great trading opportunities both during the break out or breakdown but also throughout the entire formation period, which in this case could last as long as another month or 2. Play the range of the triangle with sensible stops for as long as it lasts.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.4445 1.6620 95.85 1.0797 1.4380 1.6460 95.45 1.0765 1.4360 1.6380 93.40 1.0692 1.4292 1.6218 92.92 1.0611 1.4240 1.6190 92.24 1.0556 1.4210 1.6078 91.80 1.0452 1.4180 1.5947 90.15 1.0340 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot