Bank Of Japan Cuts Another 20 Bps. Is Rally In JPY Crosses Over?

Daily Forex Fundamentals | Written by Saxo Bank | Dec 19 08 08:05 GMT |

Commodity currencies looking vulnerable again - has USDCAD put in a bottom? Liquidity making for terrible trading conditions. LATEST HEADLINES UK GfK Consumer Confidence out at -33 vs. -39 expected Bank of Japan lowered target rate 20 bps to 0.10% Germany Nov. Producer Prices out at -1.5% MoM vs. -0.8% expected THEMES TO WATCH - UPCOMING SESSION Canada Nov. Consumer Price Index (1200) New Zealand Q3 Current Account Balance (Sunday 2145) New Zealand Q4 Westpac Consumer Confidence (Monday 0100) Japan Bank of Japan Monthly Report (Monday 0500) Market Comments The EURUSD spike continued out of control early yesterday after the ECB's Stark was out with disingenuous comments that could only be interpreted as very hawkish. The timing was more than strange considering the EUR's aggravated rally to almost new highs on a TW basis. Stark issued a general warning that overexpansive policy could lead to rising inflation and that central banks and governments need to remove easing quickly on the other side of the crisis. Seems awfully premature to worry about the other side of the crisis from where we sit! Regardless, the comments sent EURUSD all the way to its 200-day moving average just above 1.4700, where there must have been a raft of take profit orders and perhaps even new shorts, because it found pronounced resistance there. Later in the day, EURUSD slammed lower as far as 1.4190 after the ECB came out announcing a 100-bp cut in the deposit rate to encourage banks to stop hoarding cash at the ECB and get out and lend. This is not the same as cutting the standard overnight lending rate of 2.50%, which was kept unchanged. It also raised the marginal lending facility rate to the same as the new deposit rate to prevent the easy previous trade that banks engaged in by borrowing funds at the low marginal rate and then keeping them at the ECB at the higher deposit rate. We wonder if this will really loosen up credit markets in Europe considering the US experience, where little lending is taking place either despite the extremely generous Fed. The European banking system may be more leveraged than its US counterpart and while the US has already aired an awful lot of its dirty laundry, it seems the European banks are behind the curve by that measure...and there will undoubtedly be more ugly revelations ahead. In any case, the ECB moves may put a stopper to the EUR rally for the shortest term, especially vs. the JPY (see more below). We've finally had a couple of UK data points that stopped the string of horrific figures lately and manged to surprise positively, but EURGBP continues to spike out of control to the upside. Yesterday's better than expected Retail Sales and the consumer confidence figure overnight make us wonder if the EURGBP spike higher is sustainable. Beisde, the action has become downright parabolic, a sign that it will soon exhaust itself. Have we seen a climax to the rally for now? There's a lot of wood to chop to the downside for sure before we would ever attempt to call a top, but the pound has clearly moved to undervalued levels vs. its mainland counterpart on a longer term basis. USDCAD looks interesting again after rallying strongly off its lows yesterday. The brutal sell-off in crude oil continues, and this could add further upside pressure, especially if equities come under pressure today around the world as well. 1.2000 is nominal support there, and the next key objective is the old low at 1.2160. The calendar today is rather barren, but plenty of activity can result nonetheless with the very thin market conditions. Be aware also that today is the so-called triple witching in the US, when the equity option, equity index future and options on those futures all expire. The technicals are beginning to look a bit ominous in equity-land if we follow through yesterday's lows..... Chart: EURJPY The EUR finally turned tail late yesterday on the ECB's latest moves and the ugly developments in equity markets are pressuring the JPY crosses again, despite the BoJ shaving rates to near-zero levels. It's a bit of hubris, perhaps, to want to find ways to short the strongest currency around, perhaps, but we wonder if EURJPY may have topped out for now and we look for confirmation in the short term that the pair is ready to dive deep back into the old range toward 120.00 to start. Analysis Disclosure & Disclaimer SaxBank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by SaxBank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. 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