Yen Finds Footing, For Now; EURUSD Trades Sideways Amid Light Data

DailyFX

ASIA/EUROPE FOREX NEWS WRAP

The US Dollar is experiencing a mild pullback overnight after tremendous gains in the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) the past several days, all thanks to the Bank of Japan’s decision to ratchet up its QE program to the torrid pace of $200B/month. Certainly, the Yen’s fundamental standing has been dramatically weakened now that the BoJ has thrown down the gauntlet ahead of the April 8 reconfirmation – a sign that Governor Kuroda and his board are confident that their standing will be reaffirmed by opposition party DPJ.

Now, after the weak March labor market reading on Friday, the US Dollar is on softer ground, and with the 2s10s Treasury yield spread remaining compressed, markets may be signaling that the 2Q’13 may be a period of softer growth for the world’s largest economy. We could credit the slowdown in growth to the combined ripples of the fiscal cliff and the budget sequestration: higher taxes and lower government spending, both of which on their own have a negative impact on headline GDP.

Amid the lighter calendar to start the week, the Euro has continued to rally, finding continued fuel in ECB President Draghi’s most recent ‘line in the sand’ comment that there is “no plan B” for the Euro. This second ‘final stand’ – the first being his “whatever it takes” comment in July 2012 – provides a near-term bullish catalyst for the Euro. With North American labor market data disappointing so dramatically on Friday, the next week or so could be characterized by near-term countertrend moves; i.e., a stronger EURCAD.

Taking a look at European credit, slightly higher peripheral yields have held back the Euro’s modest advance on Tuesday. The Italian 2-year note yield has increased to 1.490% (+4.1-bps) while the Spanish 2-year note yield has increased to 2.099% (+9.0-bps). Similarly, the Italian 10-year note yield has increased to 4.348% (+1.8-bps) while the Spanish 10-year note yield has decreased to 4.716% (-0.3-bps); higher yields imply lower prices.

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RELATIVE PERFORMANCE (versus USD): 10:50 GMT

AUD: +0.43%

JPY: +0.38%

GBP: +0.29%

EUR:+0.22%

NZD:+0.20%

CAD:+0.06%

CHF:-0.03%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.32% (+0.49%past 5-days)

ECONOMIC CALENDAR

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TECHNICAL ANALYSIS OUTLOOK

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EURUSD: I maintain: “As I do not find the bailout terms favorable to long-lasting Euro strength, the “top” after the bailout could now be in place. Fresh yearly lows were set below 1.2800 at the time of writing [last Wednesday], with a clear test of 1.2660/80 (61.8% Fibonacci retracement on July 2012 to February 2013 rally, mid-November swing lows) in focus. A bearish bias holds so long as 1.3025 holds this week.” A Bear Flag may have formed on the daily chart against 1.2880, pointing to a move lower to 1.2660/80.

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USDJPY: The sell-off may be over now that the BoJ has jumped the gun and increased its asset purchase program. The USDJPY cleared the descending trendline off of the March 12 and March 20 highs, at 95.00/15. Topside risks are now in play, with 96.00/20 eyed to the upside, followed by 96.60/80 and 97.60/80. Support comes in at 94.20 and 92.50/75.

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GBPUSD: Last week I said: “The failed run up to the 1.5285/375 region suggests that the rally in the GBPUSD seen the past few weeks may be nothing more than short covering and asset reallocation, rather than traders taking up new positions amid an improved interest rate outlook for the UK. Price has fallen back below the 8- and 21-EMAs after a rejection at a critical RSI level of 55…A potential Bearish Rising Wedge has developed (clearer on the 4H timeframe, which would suggest a retest of the lows near 1.4830. The pattern is valid so long as 1.5260/65 holds to the upside.” Price has moved lower, initiating both the Double Top and Bearish Rising Wedge patterns.

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AUDUSD:Early last week I said: “The AUDUSD uptrend remains, but after rejection in the critical 1.0475/535 region, the uptrend is being tested at 1.0435,” then on Thursday, “Now that price has closed below 1.0435, a further pullback to 1.0370/95 is in scope before buying interest returns.” Price fell to 1.0385 – my target zone – and rebounded firmly back to the 1.0475/535 zone. Failure here would initiate a Double Top pattern, pointing to a retest of 1.0250/75. A break of 1.0475/535 points to 1.0600/35 higher.

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S&P 500: No change: “The near-term set back at 1530 took place for less than two weeks, but the break higher hasn’t been marked by high volume; no, it has been a volumeless rally, with the breakout occurring on volumes around 80% of the daily average in 2013. This is not a ‘technically strong move.’ The float higher could continue, towards the all-time high at 1576.1, but might be cut short in the 1565/70 zone, where two key Fibonacci extensions lay. I’m very skeptical up here – markets seem to be ignoring Italy and the derisive politics in the United States at the moment (this also happened in 2011 and 2012 at the beginning of those years).”

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GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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