USD/JPY continues its outperformance

On Tuesday, there was no important news to inspire EUR/USD or USD/JPY trading. In technical trade, the dollar lost some ground against the euro as short-term players locked in some profits on the recent rally. At the same time, the dollar maintained its gains against the yen even as equities were under moderate downward pressure. EUR/USD returned north of 1.29. USD/JPY held close to the cycle top in the 106.40 area.

Overnight, most Asian markets are in risk off mode. Japan is again outperforming with limited gains as USD/JPY set another correction top in the 106.50 area. BOJ’s Iwate was also remarkably positive on the Japanese economy. EUR/USD is holding north of 1.29. A risk-off context apparently can be a temporary positive for the low-yielding euro (carry trades).

Today, the eco calendar is again thin and devoid of market movers. So, trading could develop similar to yesterday. We keep a close eye at US interest rates and interest rate differentials. Yesterday, short-term differentials moved in favour of the dollar, while at the long end, bunds underperformed Treasuries. The rise in US short-term yields continues to support USD/JPY even as equities lose some ground. At the same time, the rise in short-term interest rate differentials didn’t prevent a correction higher in EUR/USD. This correction shouldn’t go far.
Nevertheless, it will be interesting to monitor the short-term price swings of the low-yielding euro in case of a more pronounced risk-off correction. Will we see some more yen-like behaviour of the single currency? The jury is still out. In a longer term perspective, we still expect rising interest rates to support the rise of the dollar against the euro.

From a technical point of view, USD/JPY confirmed the clearance of the key 105.44 resistance, opening the door for a new up-leg. The negative impact of the weak US payrolls was limited and short-lived. Better US data can still push the pair higher. At the same time, the yen remains in the defensive too, as markets see a decent chance of more BOJ easing down the road. We maintain a positive bias on USD/JPY. 110.66 is the next important resistance.

The technical picture of EUR/USD deteriorated substantially after Thursday’s break below the key 1.3105 level (Sept 2013 low). This level is now the new resistance that will be difficult to regain.

The negative deposit rate is a structural negative for the euro. In a longer term perspective, the EUR/USD downtrend is confirmed. 1.2755/1.2662 is the next key support. A more pronounced correction (EUR/USD rebound), is an opportunity to add to EUR/USD short exposure. The euro is currently working off oversold conditions.

Sterling decline slows, at least temporary

Over the previous days, sterling was sold very aggressively. Investors reduced GBP positions as polls showed that the outcome of the referendum on Scottish independence is extremely uncertain and that a separation is possible. Yesterday, the sell-off slowed, at least temporary. The eco data and a speech from BoE’s governor Carney provided a good excuse for euro shorts to lock in short-term profits. Even so, the global picture for sterling hasn’t changed.

Overnight, cable is holding stable in the low 1.61 area. EUR/GBP tested again the 0.8036 resistance on the broader rebound of the euro, but the attempt failed again.

Later today, there are no important eco data on the agenda. This afternoon, BoE’s Carney and some of his colleagues will present the inflation rapport before the UK parliament. Of late, the BoE’s Carney turned a bit more positive on the economy and even on future wage growth. Normally, sterling should profit if he repeats this message today. Hoverer, even the prospects for the UK economy are highly dependent on the outcome of the referendum on Scottish independence. In case of a yes, uncertainty on the future UK eco performance will be high and probably also affect the BOE rate hike expectations/rate path. There will also be a lot of headlines from the visit of PM Cameron to Scotland to advocate the case of a no vote. It is however unlikely it will remove uncertainty on the issue. Yesterday, there was some consolidation on the recent decline of sterling. However, we don’t see a sustained rebound of sterling until the Scotland issue is out of the way. Don’t catch the falling (sterling) knife.

Uncertainty on the referendum after the recent opinion polls made us change our ST bias on sterling last week. There is a substantial risk that this issue will keep sterling investors side-lined until it is out of the way. We removed our sell-on-upticks bias for EUR/GBP and installed stop loss protection on GBP-longs (both against USD and EUR). The euro decline after the ECB decision last week didn’t change our view. We avoid sterling long exposure short-term.