Forex - Government Increases Pressure on the BoJ to Ease

Forex News and Events: The lack of 1st tier economic data and stories that have failed to capture the market’s imagination have kept FX markets in check. However, in Japan the rhetoric is really heating up, with even stronger worded comments regarding the stronger JPY and their perpetual fight against inflation, being hurled in to the market. Japanese PM Hatoyama said that the current market pricing of the yen did not represent fundamentals and might be necessary to take aggressive action against a strong JPY. And this was on top of Finance Minister and Deputy PM Kan comments, which suggested the strength of the JPY was a problem and an FX intervention was always an option. It seems like the intense political pressure is beginning to weigh on the semi-autonomous BoJ, as rumors swirl that next week’s rates meeting will contain additional QE (additional JGB purchases ). The JPY has been supported by repatriation flows by Japanese corporate and deleveraging of risk correlated trades and corresponding contraption of yield. However, as the US Fed moves closer toward an exit strategy, combined with the BoJ actual implementation of QE, we believe the JPY will continue to be sold. After Wednesday’s EURCHF price action, which implies SNB intervention, we correctly pulled back on our expectations for Thursday rate decision. The SNB maintained the official interest rates at 0.25% and sounded overly dovish considering the momentum in inflation (although the official forecast supported this attitude). However, interestingly the SNB came out with guns still blazing on the issue of CHF strength. The central bank stated it would act “decisively” to defend unwarranted CHF appreciation against the EUR. Clearly judging the EURCHF price action, the market expects it’s only a matter of time before the SNB eases off the trigger and continues to sell EURCHF on rallies. We believe this is the correct strategy and expect it’s only a matter of time before inflation outpaces official expectations and the SNB will swiftly run out of reasons to protect the CHF. At the time of writing EURCHF broke below 1.3600 support trading down to 1.3582...this will get interesting. In Europe, the focus will be on E16 Jan Industrial Production. With three of the largest EU economies showing strong production numbers in recent weeks, the bias is toward the upside. And with the EURUSD approaching the important 1.3735 resistance, a surprise print higher could give the single currency the boost it needs to break out of its languishing range. And in the US session, markets will be keenly watching Retail Sales and Consumer Sentiment release.

Today's Key Issues (time in GMT): 10:00 EUR Jan Industrial Production, +0.7% m/m, -1.9% y/y eyed; last -1.7%, -5.0%. 11:00 GBP BoE MPC Dale speech in Cambridge. 13:30 USD Feb retail sales, ex-autos, -0.5%, -0.3% m/m eyed; last +0.5, +0.6%. 14:55 USD Mar U.Mich sentiment index - prelim, 74.5 eyed; last 73.6. 15:00 USD Jan business inventories, unch m/m eyed; last -0.2%. 15:30 EUR ECB Pres Trichet, US EconCouncil Summers, other at Stanford U. 17:00 USD TsySec Geithner speech in Washington, DC.

The Risk Today: EurUsd We’re getting tantalizingly close to the big showdown between our current range (1.3425-1.3735 as if we could have possibly forgotten) and the reigning 3 month downtrend channel that has ruled the EURUSD kingdom since December’s break of the 12-month uptrend. With the US retail sales released later today, one can’t help but feel the palpable sense of anticipation that this confrontation may occur as soon as today. The significance of the outcome is well recognized;a break above 1.3735 range highs which then goes on to conquer the major down trend (currently at 1.3780) would confirm that the 2 March 1.3435 lows represents the bottom in EURUSD for the time being, and a return above 1.4000 should be expected. Although this is our favoured scenario, we also acknowledge the potential for a false break-out with 1.3800 (50% fibonacci retracement of 1.2457-1.5145) representing an area of supply above. If, however, the 3 month downtrend wins out –which would likely play out over a number of days –then a rupture of 1.3525 support would point us towards targets near 1.3100 downtrend channel support. GbpUsd Our optimism for a bullish GBPUSD correction has been bolstered in the past 24 hours by a critical break of the 3 month downtrend at 1.5000 in yesterday’s session (and indeed a re-test of that channel which brought fresh buyers), then this morning’s bullish engulfing candlestick on the daily chart. This pattern tends to suggest the bulls are gaining the upper hand over the bears, and would reinforce the hammer candlestick we see on the weekly chart from last week. We now view the 1.4783 lows from 1 March as representing the bottom for this pair, and really, only a break back below the former channel (1.4950 currently) would force us to reconsider that view. Obviously there are headwinds above at 1.5190 which could stall a rally on the first attempt, but given the extreme short-positioning highlighted by recent IMM commitment of traders reports, there is a very good chance of a short squeeze accelerating the move higher. Major support at 1.4780 must of course still hold to ensure GBPUSD’s foundations, as next supports below are sparse at 1.4515 and 1.4375. UsdJpy Yet more encouraging signs for USDJPY bulls today as this rebound from the prior downtrend channel has continued on up to highs of 90.76 (although still shy of Wednesday’s initial break-out highs of 90.83), and ichimoku watchers will also note yesterday’s break above the cloud around 90.55. There now appears to be an ascending triangle forming on the hourly chart, which if confirmed by a break above 90.83, would look to target 92.60 levels –25 pips off the major 2-3 year downtrend channel. As such we still favour long positions, with today’s low of 90.45 coinciding nicely with support from the 50-day moving average, and further support expected at the 100-day moving average at 90.14 below (also coinciding with the back side of the prior downtrend once more). However levels on the topside come in at 91.80 (200-day moving average), then 92.15 former resistance; and we also respect the strong selling interest likely to materialize ahead of that major downtrend at 92.85, so do not hope for overly ambitious reversals higher just yet. UsdChf There has been a very significant development in USDCHF today as the thrust of CHF strength overnight has pushed the pair down through critical 1.0650 range support. This level has held since 11 Feb, but so far the follow through has not been massively impulsive, with the immediate lows only going as far as 1.0625 at the time of writing. Our next target below should come in at 1.0605-10 which represents 9 Feb lows and 38.2% Fibonacci retracement of 1.0131-1.0898, and below there the 1.0550 pivot level. Obviously, with US retail sales this afternoon there is still all to play for, and price action may be volatile enough to push us back above 1.0650; so until we get some clearer signal we would only chance short positions with very tight stops above 1.0660, or sit on the sidelines for now.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3850 1.5615 92.15 1.0980 1.3800 1.5350 91.84 1.0900 1.3735 1.5278 90.70 1.0680 1.3730 1.5113 90.43 1.0628 1.3530 1.4857 90.25 1.0600 1.3425 1.4780 89.50 1.0520 1.3300 1.4700 89.00 1.0500 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot