Yen Stunned by BoJ Nominee Kuroda; Euro Rallies on Italian Election Hopes

DailyFX

ASIA/EUROPE FOREX NEWS WRAP

Is this the most exciting week in FX thus far in 2013? I’d say so: Britain loses her hallowed ‘Aaa’ rating on Friday after the close, when Moody’s Investors Service downgraded the United Kingdom’s sovereign debt rating to ‘Aa1,’ a one-notch downgrade; Japanese Prime Minister Shinzo Abe tapped Asian Development Bank President Haruhiko Kuroda to be the next Governor of the Bank of Japan; and the Italian elections are wrapping up, with the first exit polls due out at 09:00 EST/14:00 GMT today. Let’s address these points individually.

Although the United Kingdom has lost one of its three top credit ratings, not much is actually changing: austerity remains in place, thanks to stubborn Chancellor of the Exchequer George Osborne; growth remains weak as the Bank of England is handicapped by a divided Monetary Policy Committee; and inflation pressures continue to run higher than policymakers have forecasted. I remain very bearish on the pair, and will proceed to sell any and all rallies, barring a drastic shift in the Federal Reserve’s recently hawkish rhetoric.

The BoJ nomination is interesting because, as Sara Eisen at Bloomberg News points out, Mr. Kuroda said in November 2002 that the USDJPY was too weak at ¥120.00. With the USDJPY trading near ¥93.60, at the time this report was written, I’m can with a fair degree of certitude that Mr. Kuroda thinks that the Yen is too strong at present. With energy imports’ costs already surging, a weak Yen is likely to bring more pain.

Rounding back to the Italian elections, early indications from local media are that there are lower turnout figures, which are presumed to be positive for the Euro as it means there is a reduced likelihood of Silvio Berlusconi returning to power. This has provoked a Euro rally this morning, and should continue to do so if vindicated. I’m weary of a hung parliament though, if the Berlusconi-Grillo coalition is close. Taking a look at European credit, peripheral yields remain lower amid hopes for a Euro-positive Italian election outcome. The Italian 2-year note yield has decreased to 1.630% (-2.1-bps) while the Spanish 2-year note yield has decreased to 2.470% (-3.8-bps). Likewise, the Italian 10-year note yield has decreased to 4.351% (-8.5-bps) while the Spanish 10-year note yield has decreased to 5.069% (-5.7-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 11:50 GMT

EUR: +0.57%

CHF: +0.44%

NZD: +0.30%

AUD:-0.02%

CAD:-0.10%

GBP:-0.15%

JPY:-0.37%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.08% (+0.40% past 5-days)

ECONOMIC CALENDAR

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See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

TECHNICAL ANALYSIS OUTLOOK

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EURUSD: No change: “The move below 1.3280 has been swift, and while the initial thought was to look to buy weakness, it seems that there are two significant uptrends on the verge of breaking: the ascending trendline off of the December and January lows at 1.3240; and the ascending TL off of the July and November lows at 1.3190. Additionally, the weekly RSI uptrend since mid-July has broken lower. 1.3050/70 is support, followed by 1.3000 and 1.2870/90. Resistance is 1.3280/300.”

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USDJPY: No change: “Further bullish price action as US Treasury yields strengthen and speculation over BoJ policy arises again.” Resistance comes in at 93.40/45 (monthly R1), 93.85 (weekly R1) and 94.00/10. Support comes in at 92.90/95 (weekly pivot), and 91.75/95 (weekly S1). Recent price action may be a top or a Bull Flag; waiting for confirmation above 95.00 or below 92.00.

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GBPUSD: No change: “Selling persists on further bad data from the UK and dovish commentary from the BoE, setting up for a test of the significant June 1 low at 1.5265/70. With technical conditions extremely oversold on shorter-term timeframes (1H and 4H) and longer-term views moving to extremes as well, a rebound at such a significant level wouldn’t be surprising. Support comes in there and 1.5000. Resistance is 1.5425/50, 1.5560/80, and 1.5660/80. [A massive daily Hammer has formed] – it appears the rebound may be finding footing.”

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AUDUSD:No change: “The bounce from the 1.0265/90 area may have completed, with the rally halted at the 200-DMA at 1.0305/10. The pair is sitting at the 100% extension at 1.0265 now, and a break implies a deeper setback towards 1.0135/75, early-September and –October swing lows, as well as the 161.8% extension. Although there was an overshoot into 1.0360, former support, failure has occurred, signaling further downside is possible. Price has struggled further to overcome this level. I’m still looking for a move into 1.0135/75.” Note: a potential Morning Star candlestick cluster – a bullish reversal pattern – may be forming on the daily chart.

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S&P 500: No change: “The 100% Fibonacci extension on the fiscal cliff rally and flag comes in at 1530. Bottom line: I’m expecting a significant setback (-10%) in the S&P 500 unless volumes accelerate rapidly, given the disconnect from reality. The setback has started, with the S&P 500 reversing sharply off of 1530, and putting in a daily Bearish Key Reversal yesterday. Time to start looking lower. Support comes in at 1500 and 1475. Resistance is 1520 and 1530.”

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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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