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Tuesday, 1 Nov 2011
Yen Intervention Delivers a Punch but fails to Provide Knockout Blow
After a lengthy period of jawboning the Japanese Ministry of Finance (MOF) moved to weaken the yen by selling an estimated ¥7 Trn. The timing of the move may have caught the market looking the other way given market positioning. However, the MOF failed to deliver a knockout blow as the technical damage on the charts was minimal at best.
USD - USD is Bid in Risk Off Day
With the monthly close which caps an October that saw a sharp run up in the prices of risky assets the USD has caught a bid. $89 Bn of this bid likely came from the MOF and increased criticism of the European agreement has most markets risk averse to start the week. The bankruptcy filing by MF Global may have played a part in the day's movement as the broker is a major player in many fixed income and derivative markets including European bonds.
European data underperformed today with an unexpected increase in the Italian unemployment rate and disappointing German retail sales for the month of September which fell 0.14%. US data was also lower than expected with the Chicago PMI slipping to 58.4 from 60.4. Expectations were for a smaller decline to 59.2. On a bright note Canadian GDP was stronger than forecasted rising 0.3% in August on consensus forecasts of 0.2%. This week has a number of headline events with three central bank meetings (RBA, Fed, ECB) and key data points from both the UK (Q3 GDP) and the US (NFP).
The EUR/USD has come off of its Thursday high and is testing short term support at 1.3980. A break here and the pair could shed another 70 pips to the October 17th high of 1.3910. Cable looks stronger prior to tomorrow's glut of UK data. Resistance comes in at last week's high/200-day moving average at 1.6150 with the next major resistance at the late August high of 1.6450.
JPY - Yen Intervention Delivers a Punch but fails to Provide Knock Out Blow
In their latest foray into the FX markets the MOF did a good job of catching the market off guard. Rumors of intervention were circulating last Thursday and Friday but the MOF smartly waited until the moment had passed before letting their traders sell an estimated ¥7 Trn or $89.8 Bn during the week's opening Asian trading session.
Markets looked ill prepared for the latest round of intervention as this past week's CFTC Commitment of Traders Report showed speculators held their largest long position in the JPY in almost two years. While the sheer numbers and the initial move look overwhelming the technical damage on the charts was minimal. The USD/JPY soared to a high of 79.50 before Japanese exporters began to offer at more attractive prices. As such the pair failed to overcome its 4 year downtrend line from June 2007 and quickly fell to the 77.80 support. Below here support is found at 77.50 as well as 76.10 from the bottom of the August/September consolidation pattern.
It will be interesting to see what the reaction by the G20 will be to the Japanese government's decision to take on JPY strength alone once again. Will the Japanese representation be met with criticism or friendly smiles given the likelihood of a Japanese investment in the EFSF?
AUD - RBA Could Lower Interest Rates
Today the Reserve Bank of Australia will announce its interest rate decision with most analysts expecting a 25 bp rate cut to 4.50%. A drop in core inflation may allow the RBA some room for a cut in the rate but a recent uptick in global economic data (US Q3 GDP, Chinese PMI) has some rethinking their all but certain Australian rates forecasts from one month ago when the global investment climate was considerably more foggy.
Nevertheless the AUD has performed well in October with the AUD/USD rising 9.5% in-line with other risky assets. A breach of the October high at 1.0750 will have traders looking to the all-time high from July at 1.1080. Support is seen back at 1.0320 from October 26th low.
Gold - Spot Gold Prices Down with USD Gains
Spot gold prices were down as the USD posted gains after the FX intervention by the Japanese MOF. However, spot gold prices may have more room to run higher should the Federal Reserve signal this week its intention to ramp up its bond buying program once again (QE3).
Gold traded as low as $1,704 during the Asian trading session but has since paired those losses. The $1,710-$1,695 range has been a significant price range since the sharp 3-day decline in spot gold prices during late August. A move higher may have scope to $1,772, the 61% retracement from the collapse in gold over the month of September.
An impressive run higher over the month of October took the EUR/USD as high as 1.4250, the 61% retracement from the May to October move. However, a failure of the pair to overcome this key technical mark does not bode well for the EUR in the near term. Also worth noting is the failure of the pair to move above its previously broken trend line from the June 2010 and the January 2011 lows. Falling stochastics on the daily and weekly chart also point to declines in the value EUR/USD. Support is located at 1.3915 from the October 17th high followed by 1.3650 off of the October 18th low and the October low at 1.3145. The 61% retracement level will serve as initial resistance with additional selling perhaps at 1.4450 from the trend line off of the May and July highs.
Cable has failed to climb above both its 200-day moving average and stopped short of its 61% Fibonacci retracement target from the April to October move which at 1.6150 should serve as initial resistance. A move higher could go on to test the 1.6450 resistance off of the August high though daily stochastics have crossed and the weekly stochastics are beginning to roll lower as well. As such, a move lower could find support at 1.5890 from the October 26th low as well as the October 18th low of 1.5630.
Another round of intervention has lifted the USD/JPY 400 pips for a 5.29% gain. However, the pair's sharp move higher was unable to break a key falling trend line from the 2007 high which comes in this week at 79.70. With the long term downtrend still intact a move lower may once again test the all-time lows the pair will first encounter support at 77.85 from the September high as well as 77.50 from the mid-October high. Should the intervention continue the Japanese Ministry of Finance may find willing offers waiting at 80.20 which was the peak of the last round of intervention in August.
The Swiss franc has once again resumed its downtrend versus the USD after moving as low as 0.8550, a level that has previously served as both support and resistance. A bounce from here could find an offer at 0.8900 from the resistance line off of the October peak. Should the downtrend from October extend into November a break of 0.8550 may have scope to 0.8240 from the August high.
The Wild Card
The intervention by the Japanese Ministry of Finance propelled the pair 4.1% but the EUR/JPY failed to break above two major technical barriers; the August high at 111.90 and the pair's 200-day moving average at 112.70. Forex traders should note should the long-term downtrend looks to have held. Support may be found at the previously broken trend line from the April and July highs which comes in at 109.80 followed by the last week's high of 108.10.
|01:30||AUD||Westpac Consumer Sentiment||-5.6%||-||-|
|01:50||JPY||M2 Money Stock||y/y||4.2%||4.3%||-|
|10:30||GBP||Average Earnings Index 3m/y||2.9%||3.1%||-|
|10:30||GBP||Claimant Count Change||1.2K||-2.3K||-|
|11:00||CHF||ZEW Economic Expectations||9.7||-||-|
|14:30||USD||NZD Core Retail Sales||m/m||0.1%||-0.1%||-|
|23:30||NZD||Business NZ Manufacturing Index||55.0||-||-|