Japanese Yen: BoJ Has to Leverage Stimulus or Face Yen Reversal

DailyFX

  • Dollar Traders More Reactive to S&P 500, NFPs or BoJ?
  • Japanese Yen: BoJ Has to Leverage Stimulus or Face Yen Reversal
  • British Pound Ready to Run if Bank of England Holds Steady
  • Euro Crisis Shifts to Italy, Slovenia, ECB and Systemic Issues
  • Australian Dollar at the End of its Rate Cut Regime, RBA on Tap
  • Canadian Dollar Gaining Central Bank Favor, Ready for Jobs Volatility
  • Gold Carves Out its Fourth Smallest Weekly Range in 2 Years Ahead of Stimulus Wave

Range Trade Strategies work best in quiet market conditions - such as the Asia trading session

Dollar Traders More Reactive to S&P 500, NFPs or BoJ?

Despite the constant expansion of the Fed’s balance sheet and a fresh record high from the risk benchmark S&P 500, the dollar managed to close the week in the green. This was a ‘passive’ advance, however, just as the equities move was founded on a deficient fundamental backing – which was manifest in the tepid volume levels. Yet, where traders had to scrounge for a driver the past week, the greenback will be overwhelmed for catalysts moving forward. And, considering the positioning of the greenback against its most liquid counterparts, a dedicated driver is needed. From the Dow Jones FXCM Dollar Index (ticker = USDollar), the 10,463 close on Friday marks the sixth consecutive monthly advance for the benchmark – the longest run on record. We see this same strength in EURUSD’s 6.5 percent rally the past two months, GBPUSD’s nearly 10 percent tumble since the year open and USDJPY’s 25 percent rally in the past six months.

After an exceptional run to multi-month highs, the stress for a correction will be high – especially if risk positioning continues to climb and slowly leach capital from US assets that are undercut by yields that have been dehydrated by stimulus. Looking ahead, the most recognizable catalyst is Friday’s nonfarm payrolls (NFPS). The February employment figures are indeed important as they will eventually turn the tide on QE3. Yet, this end-of-week release is less pressing after the past week’s FOMC hold. The market will judge the dollar on its stimulus, but they will do so by way of comparison to other central banks’ efforts. The Bank of Japan (BoJ), Bank of England (BoE) and European Central Bank (ECB) are all looking at some degree of possible balance sheet expansion. Can they offset the Fed and leverage the dollar?

Japanese Yen: BoJ Has to Leverage Stimulus or Face Yen Reversal

In the flood of event risk this coming week, the BoJ rate decision on Thursday morning carries the greatest potential for generating volatility and consistent trend. It also arguably carries the most clearly defined scenarios for traders to work with. Ever since Shinzo Abe began his run to the Prime Minister seat on the vow of ending deflation and stabilizing the economy, expectations of extraordinary and external support has soared. At this point, expectations have far outpaced actual policy – a realization that has seen USDJPY and other yen crosses level off over the past few months. The fact that the yen hasn’t extended its aggressive decline over the past two months despite the change of leadership at the BoJ and the vague vows made by new Governor Kuroda and his Deputy Governors tells us that the bar is set very high.

For the past five years as global central banks have expanded their stimulus programs in order to fend off liquidity crises, financial disarray and recession; we have seen a strong, inverse correlation between the size of the support program and the currency’s strength. This connection is what makes the yen’s fundamental discrepancy so evident. USDJPY rallied as much as another 12 percent since the beginning of the year even as the Fed bought $85 billion in assets a month and the BoJ held steady. If the central bank does not at least move forward its ¥13 trillion-per-month program to May as bulls’ expectation, the yen crosses could be set for an abrupt correction.

British Pound Ready to Run if Bank of England Holds Steady

The sterling-BoE fundamental scheme is like a scaled down version of the yen-BoJ setup. Since the beginning of the year, GBPUSD has tumbled over 1,300 pips from 1.6400 on the growing expectation that the Monetary Policy Committee (MPC) will ramp up its stimulus program to compete with the Fed’s QE 3-laden and ECB’s LTRO-padded regimes. There is certainly argument to be made with Marc Carney coming onboard in July and Chancellor Osborne recently offering a remit (greater allowances to deviate from CPI), but this may just be community stimulus expectation. There was no change to the vote in the minutes at the last meeting. What if the BoE is mum despite its allowances…

Euro Crisis Shifts to Italy, Slovenia, ECB and Systemic IssuesCyprus can still cause problems for the broader Eurozone, but the imminent risk is far reduced from where has been over the past two weeks. However, that doesn’t mean the Euro is looking at an immediate return to bullish form. Systemic fears have been stirred, and there are new threats within view. Greece and Spain are lingering threats under the new ‘bank levy’ option (which investors will try to escape at any sign of risk), but we also have more active threats. We’ll find a financial outlook for Slovenia and Italy will have to decide a government path next week.

Australian Dollar at the End of its Rate Cut Regime, RBA on Tap

There are four major central bank rate decisions scheduled for the coming week; and the Reserve Bank of Australia’s (RBA) meeting carries the least, short-term market moving potential. Yet, it will still be critical for shaping the Aussie dollar’s bearings. In the past six months, we have seen the 12-month rate forecast price in nearly 5, 25 bp rate cuts to serious debate over whether there will be even one. The language from Governor Stevens and crew hasn’t shifted much. But given the market’s bearings; if he were to shift, it would make the currency a resilient carry option.

Canadian Dollar Gaining Central Bank Favor, Ready for Jobs Volatility

Last year the IMF noted that it was examining whether the Canadian (and Aussie) dollar would be giving the distinction of ‘reserve currency’. This potential honor comes as central banks increase their holdings of the loonie, and the IMF’s quarterly report shows that share continues to grow. Meanwhile, volatility traders will be watching the March employment figures Friday. But, be aware of the cross influence from US data.

Gold Carves Out its Fourth Smallest Weekly Range in 2 Years Ahead of Stimulus Wave

The range on gold this past week was a meager $23.9. That is the fourth smallest weekly range for the commodity in two years – remarkable given that the bull trend transitioned to congestion back in September 2011. Similar measures of restraint are found in the multi-month lows in futures open interest, drop in ETF holdings and serious departure in volume. If these circumstances hold, the metal can pitch into a deeper reversal from its record breaking run. However, we have possible BoJ and BoE stimulus upgrades along with Eurozone tumultahead.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

JPY

Official Reserve Assets

$1258.8B

Declining steadily since 2012. Used by BoJ to help prevent unwanted appreciation or depreciation of Yen.

1:00

CNY

Manufacturing PMI

51.2

50.1

Trending downward since 12/09. Flirting in an out of contractionary levels since 11/11.

1:45

CNY

HSBC Manufacturing PMI

51.5

50.4

Often used as leading indicator for entire economy due to economy’s heavy focus on manufacturing.

5:00

JPY

Vehicle Sales (YoY)

-12.20%

Negative sales growth over last 6 months points to continual economic struggles.

12:58

USD

Markit US PMI Final

55.2

Based on 85%-90% of PMI survey responses. Expansionary levels over last 10 months.

14:00

USD

Construction Spending (MoM)

0.80%

-2.10%

Volatile data set. Only looks at new construction. 9M straight of positive growth prior to most recent release, indicating sustained growth.

14:00

USD

ISM Manufacturing

54.2

54.2

Expansionary 35 of last 36 months. Indicates sustained manufacturing growth in US econ.

14:00

USD

ISM Prices Paid

59.5

61.5

Rising levels since 11/12 indicate greater expectations of future inflation. May lead to potential dollar depreciation.

22:30

AUD

AiG Performance of Manufacturing Index

45.6

Contractionary since 3/12, however, service and exports industry more key to AU growth

23:00

AUD

RPData-Rismark House PX Actual

Increasing home levels may point to potential housing bubble, could bolster preventative RBA action

23:01

GBP

Lloyds Business Barometer

13

UK businesses have been more optimistic over last 8 months. However, Indicator trending downwards over last 3 months.

23:50

JPY

Monetary Base (YoY)

Monetary base expanding upwards since 3/12. Expected to expand even further in future due to anticipated BOJ asset purchases, leading to Yen depreciation.

GMT

Currency

Upcoming Events & Speeches

-:-

JPY

Official Fiscal Year End

-:-

RUB

Russia Sovereign Wealth Fund Stats (MAR)

-:-

INR

India Government Reduces Investment Restrictions

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

15.0000

2.0000

9.8365

7.8165

1.3650

Resist 2

7.5800

5.8300

6.1150

Resist 1

12.9000

1.9000

9.5500

7.8075

1.3250

Resist 1

6.8155

5.7955

5.8620

Spot

12.3312

1.8103

9.2362

7.7636

1.2403

Spot

6.5281

5.8162

5.8472

Support 1

12.2385

1.6500

8.7750

7.7490

1.2000

Support 1

6.0800

5.6075

5.5000

Support 2

11.5200

1.5725

8.5650

7.7450

1.1800

Support 2

5.8085

5.4440

5.3040

INTRA-DAY PROBABILITY BANDS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.2936

1.5311

95.39

0.9572

1.0238

1.0497

0.8450

122.55

144.91

Resist. 2

1.2907

1.5283

95.09

0.9552

1.0222

1.0477

0.8430

122.10

144.47

Resist. 1

1.2878

1.5254

94.80

0.9532

1.0206

1.0458

0.8411

121.65

144.03

Spot

1.2819

1.5198

94.22

0.9492

1.0174

1.0419

0.8371

120.76

143.15

Support 1

1.2760

1.5142

93.64

0.9452

1.0142

1.0380

0.8331

119.87

142.27

Support 2

1.2731

1.5113

93.35

0.9432

1.0126

1.0361

0.8312

119.42

141.83

Support 3

1.2702

1.5085

93.05

0.9412

1.0110

1.0341

0.8292

118.97

141.39

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

Sign up for John’s email distribution list, here.

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