USDJPY: What a Rally!

Forex News and Events:

The Asian session opened the week with a positive bias; the majority of stocks rose higher, while FX markets continue to be dominated by the aggressive rotation out of the JPY and USD. The EUR has led the gainers with strong bullish trends developing in EURUSD, EURGBP and EURJPY, while USDJPY keeps on running towards fresh highs.

Don’t look for Mean Reversion for Mean Reversion Sake

The key drivers of EUR move has been the improvement in economic conditions (signs of stabilization in Italy and Spain) and the overall perception of reduced financial stability risks in the euro area. We suspect that this trend (or consolidation of gains) of EUR strength will continue this week. We don’t expect any major announcements or policy changes at this week’s ECB meeting. Despite the concerns over the strong EUR, we could get a more upbeat Draghi and the potential good time spoiler in questions regarding the recent spike in funding costs (due to LTRO reimbursements). We see limited scope for upside surprise since the vast majority of positive news relating to euro-area econ data improvements and subsequent lower probability of easing has been priced into the Euro. However, any sell on fact should be limited.

As released, EC Sentix Investor Confidence remains short of expectations, while Euro-Zone monthly and yearly PPIs were perfectly in line with estimates. EURUSD fell on speculation selling this morning. We believe that the currency should find support at 1.3530 / 40 zone, before potentially extending its weakness below 1.35.

What do you do with a 450bn Long EUR position?

We saw last week that there was little change in the IMFs SNB FX reserves and this week we will get a bit more color regarding pressure on the CHF. While some Swiss data has muddled along the sharp improvement in PMI indicates that EURCHF rally might have less fundamental justification then originally viewed. This week we have sight deposit data, which could provide more clarity on market fears that the SNB will create policy to cut excess reserves. The Euroswiss curve is now positive while forwards have come in significantly, so it would be interesting to see how much natural migration has occurred as Europe stability has improved and EU | Swiss relative value come into play. The swiss franc started the week by partly writing-off Friday gains. EURCHF recovered from 1.23074 two-week low, while USDJPY tests 91.00 resistance consolidating back from 0.9022, ten-month low.

Quick Note on JPY

We still believe Abe will throw whatever it takes to reach its inflation target despite backlash and the BoJ dragging their feet. The Japanese authorities have committed themselves to a 2% inflation target. However it’s the markets skepticism forecasted economic growth ability in influence inflation, which has halted an all out route. We suspect policymakers will continue to verbalize their displeasure and use JPY as an actual tool to boost inflation. USDJPY will continue to climb. We look at 95.00 as the first target, as USDJPY is already over 93.00.

Today's Key Issues (time in GMT):

2013-02-04T09:30:00 EUR Feb Sentix index, actual -3.9, exp. -3.0; last -7.0.
2013-02-04T09:30:00 GBP Jan PMI - construction, actual 48.7, exp. 49.1; last 48.7.
2013-02-04T10:00:00 EUR Dec PPI m/m, actual -0.2%, exp. -0.2%, last -0.2%,
2013-02-04T10:00:00 EUR Dec PPI y/y, actual 2.1, exp. 2.1%; last 2.1%.
2013-02-04T14:45:00 USD Jan ISM NY NAPM index; last 563.2.
2013-02-04T15:00:00 USD Jan Conference Board employment trend index; last 109.0.
2013-02-04T15:00:00 USD Dec factory orders, +2.2% m/m eyed, IFR +1.8%; last unch.
2013-02-04T15:00:00 USD Dec factory orders ex-transport, IFR +0.2% m/m eyed.

The Risk Today:

EURUSD EURUSD bulls have shown no fear of heights as the pair rallied aggressively to 1.3710 (taking out our 1.3690 target) – with no real pullback or pauses till now. Today we are seeing a slight correction on profit-taking slightly helping to ease overbought conditions. However with other bullish technical indicators such as trend in MACD and uptrend channel undamaged (consecutive higher highs and higher lows), we suspect a test of 1.3868 is highly probable. The first level of resistance remains at 1.3690 / 1.3710 (27th Sept high) then 1.3868 (9th Dec high). The next support is located at 1.3491 (25th Jan low), 1.3256 (Dec range floor), 1.3123 (65d MA & Uptrend channel), 1.2931 (11th Dec low), 1.2878 (7th Nov reaction high), 1.2787 (200d MA), 1.2722 (13th Nov pivot high), 1.2630/62 (3rd July high & 100d MA), 1.2463 (31st Aug low), and 1.2386 (14th & 17th Aug high).

GBPUSD GBPUSD has sharply reversed course with the deep sell -off hitting 1.5690 low. While the pair remains between at 1.5673 – 1.5891 range, the bearish trend and momentum indicators suggest further downside should be anticipated. Key support is located at 1.5673. The support zone is located at 1.5673 (28th Jan low), 1.5574 (9th Aug high), 1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low). Watch for next resistance to come into play at 1.5891 (200d MA & 21st Jan high), 1.6007 (18th Jan high), 1.5921 (200d MA), 1.6180 (10th Jan high), 1.6340 (2nd Jan high) and 1.6454 (29th Aug ’11 top).

USDJPY USDJPY has had another impressive burst, taking the pair to fresh highs above 92.96 (taking out our 92.49 target), and shifting focus back to the topside. Today we are seeing momentum slowing as traders take profits but we believe demand will kicking around 92.00. In the mid-term, despite one-directional rise we think fundamentals have set the course and expected an extension target of 94.49. On the downside, support is eyed at 89.35 (11th Jan high), 88.88 (21d MA), 88.10 (23rd Jan low), 87.60 (16th Jan low), 86.64 (27th Dec high), 85.54 (5th April high), 84.23 (15th March high) 81.50/69 (15th Nov. high & 28th Nov. low), 81.00 (16th April pivot), 79.06 (9th Nov low), then 78.75 (8th Oct high). Above us, minor resistance remains at 94.19 (Fibo lvl Jun 2007 high to Oct 2011 low) .

USDCHF USDCHF bears had charged in pushing the pair down to 0.9022 but since then the supply has dried up. That said the deep pullback has been support by momentum and trend indictors (back in downtrend) and suggests further downside should be expected. The violation of 0.9085 (in the absent of a recovery rally through 0.9180) should trigger extended weakness to 0.8929. The first levels of support remains at 0.9085 (20th Dec low) , 0.9041 (1st May low) then 0.8928 (Feb 12’ low). The next levels of resistance are located 0.9214 (29th Jan high), 0.9304 (100d MA), 0.9385 (18th Jan high), 0.9457 (21st Sept high), 0.9515 (13th Nov high & uptrend top), 0.9610 / 20 (26th Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), and 1.0000 (psychological resistance).

Resistance and Support: