USD/JPY Drops Below Key Support Area

Daily Forex Fundamentals | Written by KBC Bank | Jul 09 09 07:22 GMT |

Sunrise Market Commentary Government bonds surge on increased risk aversion Yesterday, investors fled to safe government bonds, as the downward correction on the commodity and equity markets continued, despite a late rebound in Wall Street. The rally on the bond markets may however have run its course for now, unless the S&P would clearly break below the 875 level. FX: USD/JPY drops below key support area Investor caution ahead of the earnings season triggered some temporary yen buying panic. USD/JPY dropped below the key 93.55 range bottom. The G8 didn't make any high profile comments on the dollar. Gyrations on the stock markets continue to be the most important single driver for trading in the major currency cross rates. The Sunrise Headlines Yesterday, US Equities had difficulties to choose their side ahead of the start of the second quarter earnings season. This morning, Asian shares trade mixed. The global economy is slowly pulling out of recession, the International Monetary Fund said on Wednesday, marking up its growth forecasts for next year and hinting that it might reduce its estimates for bank losses. Alistair Darling's blueprint for reforming the financial regulatory regime failed to impress yesterday. The Conservative opposition offered a direct challenge by setting out its own plans for bank regulation. The German trade surplus unexpectedly widened in May as exports rose by 0.3% M/M, while imports fell by 2.1% M/M. Alcoa, the largest US aluminum producer, posted a third consecutive quarterly loss on Wednesday, but cost cuts helped the aluminum maker to beat Wall Street estimates. Crude oil ($60.69) dropped for the sixth consecutive session on Wednesday as OPEC said world demand may take years to recover from the slump in 2009 because of economic weakness and demand destruction. Today, the calendar contains the UK trade balance, US claims and wholesale inventories. The Bank of England will decide on monetary policy Currencies: USD/JPY Drops Below Key Support Area EUR/USD On Wednesday, EUR/USD was initially traded in a surprisingly tight sideways trading range. The pair dropped to the 1.3860/65 area at the start of trading in Europe but there were no follow-through losses. On the contrary, the losses on the European stock markets were not excessive, given the decline on Tuesday evening in the US. On top of that, the German data came out better than expected for the second day in a row as the German IP rose 3.7% M/M in May. In this context, the downside in the euro was rather well protected and the EUR/USD pair hovered around the 1.39 big figure. The G8 didn't make any declarations on the status of the US dollar as reserve currency. According to declarations, the G5 discussed the use of alternative currencies to settle trade among themselves, but also this message had no impact on trading. However; investors again turned more negative after the open of the US stock markets. Mounting selling pressure from EUR/JPY, through the cross rates put EUR/USD under pressure. The pair set an intraday low in the 1.3835 area. Later in US trading, stocks also EUR/USD was saved by a late session rebound. EUR/USD closed the session at 1.3884 (1.3924 on Tuesday). EUR/USD: saved by late session US tock market rebound Support comes in at 1.3832/26 (Reaction lows) and 1.3798 (Daily envelope), at 1.3784/82 (Weekly envelope/ Boll bottom), at 1.3748/39 (16 July low/Neckline double bottom), at 1.3620 (38 % retracement). Resistance stands at 1.3939 (Reaction high/Daily envelope), at 1.3989/96 (MTMA/LTMA), at 1.4051 (Week high), at 1.4110 (Weekly envelope), at 1.4133 (Boll Top) and at 1.4202 (Reaction high). The pair is moving into oversold territory. USD/JPY Today, the US weekly jobless claims and the wholesale inventories are scheduled for release and later in the session the US Treasury will auction 30-year bonds. The European calendar is thin. So, once again, watching the stock markets will be the name of the game. In this respect, the S&P yesterday dropped temporary below the key 875 support area but still managed to close above this level. The jury is still out whether this key level will hold. In a daily perspective, markets reacted rather positive to the Alcoa results. This 'positive' reaction also helped EUR/USD to rebound off from yesterday's lows and might slow the EUR/USD decline today. Of course, the earnings season still has a very long way to go. We would be very surprised not to see other pockets of investor skepticism in the weeks ahead. This will continue to have an impact on EUR/USD trading, too. Global context. During the month of June, EUR/USD kept a sideways trading pattern. Global investors turned again more cautious on the strength of a potential economic recovery and this capped the ascent in EUR/USD. However, the dollar was not able to take the lead either. After all, the correction on the stock markets was rather muted. On top of that, any hopes that the Fed would raise rates rather soon proved not justified. From time to time, the debate on the status of the dollar as reserve currency resurfaced, causing temporary set-backs for the US currency. Regarding the European side of the story, we recently took notice of the fact that some ECB members had become more concerned that the ECB measures didn't filter through enough into bank lending. The ECB potentially moving further in the direction of new unconventional measures might, at some point, become a negative factor for the euro, too. However, at least for now, ECB's Trichet didn't give any signals that the ECB is preparing any additional unconventional policy steps to address this issue. This left the global picture for EUR/USD trading rather neutral and indecisive. None of those themes is currently able to set the tone for EUR/USD trading. So, EUR/USD traders continue to watch global investor sentiment and track the swings on the stock markets. Looking at the technical charts, the EUR/USD currency pair settled in a sideways trading pattern between 1.3739 and 1.4338. Last week, the pair moved closer to the top of this range, but a real test of the 1.4338 level didn't occur as the rebound stalled in the 1.42-area. Recently, we advocated that a break of this area would be difficult and maintained a sell-on-upticks approach. We hold on to that bias. More stock market weakness might open the way for return action to the range bottom at the 1.3750/39 area. On Wednesday, USD/JPY experienced quite a volatile trading session. In Europe, the pair hovered in a tight range in the low 94 area. However, some kind of yen buying panic kicked in exactly at the time when the S&P dropped below the key 875 area. At the same time, the oil price made a steep decline, too. Market liquidity dried up and several yen cross rates experienced a temporary free-fall. USD/JPY fell below the key 93.55 support. Finally support was found in the 91.80 area. The late session rebound on the US stock markets also helped USD/JPY (and several other yen cross rates) to recoup part of the earlier losses. Nevertheless, USD/JPY closed the session at 92.88, still quite a significant loss compared to the 94.89 close on Tuesday evening. This morning, Japanese stock markets are showing losses of around 1.50% at the moment of writing. However, in most other Asian markets, the losses are much more contained. Chinese stock markets are even in positive territory. After yesterday's steep rise of the yen, Japanese officials (a government spokesman) came out to give the (predictable) warning that excessive currency moves are undesirable and that they kept a close watch on currency market trends. However, at this stage, we don't have the impression that interventions are around the corner. Global context. Since March, USD/JPY developed a sideways trading pattern between 101.40 and 93.86/54 (May low/March low). The 'traditional link' between USD/JPY and the performance of global stock markets/risk appetite still played a role, but at some times it was not as tight is it used to be some time ago. At the end of May, USD/JPY came relatively close to the key 93.54 range bottom, but a real test/break didn't occur. However, yesterday's flaring up of investor caution ahead of the earnings season and a test of key support levels in other markets (S&P) hammered the pair through the longstanding 93.55 range bottom. After this high profile technical signal, we are forced to leave our neutral bias/range trading strategy in this pair. For now, the verbal support from Japanese officials, at best, is able to slow the decline in this pair. A sustained rebound only looks possible if stock markets sentiment were to improve for the better. We don't bet on such scenario yet. Tight stoploss protection on USD/JPY longs is still warranted. Short-term players can look to sell into strength. Sell-off hammers USD/JPY through long-term range bottom Support stands at 92.94 (Break-up), at 91.93/80 (Daily envelope/ST low), at 0.8970 (Feb low), at 88.80 (1st target double top). Resistance comes in at 93.85 (Previous reaction low), at 94.20/35 (Breakdown/ STMA), at 94.70 (Breakdown daily) and at 95.33/57 (MTMA/Boll Midline). The pair is in oversold territory. EUR/GBP Yesterday, the decline of sterling slowed, both against the dollar and the euro. The UK currency continued to lose ground early in the session. EUR/GBP set a new (albeit minor) high in the 0.8670 area around noon. A weaker than expected US house prices release supported this move. However, the EUR/GBP rebound ran into resistance and the pair settled in the mid 0.86 area. Today, the UK trade balance is schedulled for release. However, all eyes in the UK will be on the BoE interest rate decision and even more on the statement of the Bank. We expect the Bank to announce that it will raise the amount of asset purchase to the full amount approved of £150. Over the previous days, there were several calls for the Bank to extend its asset purchases beyond this level. We don't expect the BoE to take already any engagement on this issue today. We expect this to be discussed and decided at the August meeting (together with a new inflation report). Nevertheless, more negative economic news headlines might fuel market speculation that the BoE will have to take additional steps (ask for government approval to raise the amount of asset purchases). This would again create a sterling negative environment. Global context. During the month of May, sterling performed a remarkable rebound against the euro (and the dollar) supported by improving eco data. The break below the EUR/GBP level of 0.8637 was a clear signal that something had changed in investor sentiment towards the UK currency. We turned to a neutral approach vis-à-vis the UK currency. Nevertheless, there is still a lot of uncertainty on the BoE policy going forward (cf supra). On top of that, recent comments from BoE policy members gave the impression that they felt quite comfortable with a weak pound to support the economy. Over the previous two weeks, the ascent of sterling ran into resistance. Apparently, enough good news had been priced in for sterling at the current levels. At first, the sterling losses were still rather contained, but over the previous sessions, sterling faced more selling pressure. EUR/GBP regained the 0.8600 resistance area, improving the ST picture in this pair. Over the previous days, we indicated that we had the impression that the downside in this pair has become better protected and that we wouldn't be surprised to see EUR/GBP building on this first technical signal. We hold on to that bias, even as there are some tentative signs that the rebound is slowing. The 0.8867 reaction high is the next high profile resistance on the charts and could be the target of this correction EUR/GBP: rebound slows Support comes in at 0.8609/05 (STMA/Daily envelope), at 0.8575/70 (Reaction lows hourly), at 0.8558(Week low/MTMA) and at 0.8511/94 (Reaction low/Break-up). Resistance is seen at 0.8650/72 (Boll top/Week high), at 0.8688 (daily envelope62 % retracement off 0.8866), at 0.8730/34 (23 % LT/LT break-down). The pair is moving into overbought territory. News EMU: German IP rises at fastest pace in 16 years The final figure of euro zone first quarter GDP confirmed the previous estimate, which showed a contraction by 2.5% Q/Q. The yearly figure was however slightly downwardly revised from -4.8% Y/Y to -4.9% Y/Y. Looking at the breakdown, government spending (0.2% Q/Q from 0.0% Q/Q) and investments (-4.1% Q/Q from - 4.2% Q/Q) were upwardly revised compared to the previous release, while both exports (-8.8% Q/Q from -8.1% Q/Q) and imports (-7.6% Q/Q from -7.2% Q/Q) were downwardly revised. German industrial production grew by a much bigger than expected 3.7% M/M in May, while the previous figure was downwardly revised from -1.9% M/M to -2.6% M/M. The details show that the improvement was based in the manufacturing sector (5.1% M/M) with significant increases in capital goods (8.3% M/M) and intermediate goods (4.3% M/M), while consumer goods rose by a more modest 0.6% M/M. Both energy (-3.8% M/M) and construction (-3.2% M/M) declined significantly. This is the fastest pace German industrial production rose in nearly 16 years which bolsters hopes that Europe's biggest economy is starting to recover. Other: UK house prices decline again in June In the UK, house prices dropped by 0.5% M/M in June, according to the Halifax house price index, while the consensus was looking for a slight increase. On a yearly basis, house prices are down by 15.0% Y/Y (from -16.3% Y/Y). The outcome is a bit disappointing after the significant increase in May and indicates that the UK housing market remains fragile Download entire Sunrise Market Commentary Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.