BOJ easing pushes USD/JPY to new cycle highs

On Thursday, follow through dollar buying after the FOMC decision pushed the dollar still further up against euro and yen during the Asian and early European session, but fatigue set in. The inability to make further headway on a disappointingly lower German CPI and on a stronger US Q3 GDP suggests that the EUR/USD 1.25 support remains out of reach for now. EUR/USD closed finally at 1.2613, down from 1.2632 previously.

Overnight, the BoJ surprisingly decided with a narrow 5-4 majority to ease policy further. More in particularly, the BOJ will expand its annual target for JGB holdings and other assets from ¥60-70 trillion to ¥80 trillion. The aim is to push yields lower across the curve (and without saying it weakening the yen). The decline in yields was very modest (though outperformance of 30-yr: -7.4 bps), but the weakening of the yen substantial. Increased risks to miss its 2% inflation objective and a struggling economy (due to a sales tax rise) were the triggers for the decision. Coming on the heels of the Fed decision to stop QE, the BoJ highlights the different path both central banks are following. In these circumstances the sharp weakening of the yen should not be a huge surprise. USD/JPY, which yesterday also showed early signs of fatigue, spiked higher and follow through yen selling pushed the pair to the 111 handle currently. The timing was excellent and from a technical point of view, it might be important too. Indeed, the pair took out the recent top and even the August 2008 high (110.66). If breaks are confirmed, technically there is no big hurdle anymore till the psychological 120 mark and the major LT 2007 top (124.11). We will contemplate on the strategy going forward and if needed adapt our already bullish dollar stance.

Today, the eco calendar is interesting (see FI section for full coverage). EMU inflation will likely fall short of the expectations, but after the lower German inflation reported yesterday, it would not be a major surprise. A renewed drop to 0.3% Y/Y might nevertheless still be euro negative. During the US session, the Cost Employment Index for Q3 might get more than usual attention, after the sharp upward surprise in Q2. Another upward surprise (and high surprise) may ease inflation concerns and “justify” the Fed’s “hawkishness” earlier this week. We have no strong opinion on the outcome of the ECI though. For the Chicago PMI and Michigan consumer sentiment we see risks for an upside surprise, which should be dollar positive.

Regarding EUR/USD trading, the eco calendar suggests that dollar strength may prevail. The surge of USD/JPY carries a bit over in EUR/USD that trades currently near 1.2570, down from opening levels above 1.26. However, yesterday’s price action suggested that the dollar wasn’t ready to resume its uptrend against the euro. In this respect EUR/USD 1.25 is the key support that needs to be broken. We have a bullish LT view on the dollar and felt vindicated in this view by the FOMC decision on Wednesday. However, we are short term a bit sceptical about the chances to break through 1.25. So, we prefer to buy the dollar higher in the EUR/USD 1.25-1.2995 (consolidation) range.

The technical picture of EUR/USD deteriorated after the break below the key 1.2662 support (Nov 2012 low). We have a LT neg. bias on EUR/USD. The downtrend is intact and overbought dollar conditions have been worked off. The FOMC decision is a dollar positive, but should now be supplemented by strong US eco data to push the pair below 1.25, crucial support, before the technical picture becomes again dollar bullish ST. The 1.2043/1.1877 level (support) is the next LT target. An unlikely re-break above 1.2995 would question the EUR/USD downtrend.

EUR/GBP still stuck in listless consolidation trading

On Thursday, EUR/GBP trading remained an island of tranquillity also after the Fed came out surprisingly hawkish on Wednesday. While the Fed and the BoE have understandably no specific institutional features in common, both were in the past two years sometimes seen as confronting similar economic and monetary circumstances. However, lower UK inflation and a slowing economy, influence by big neighbour EMU, have lowered the BoE rate hike expectations and loosened the band that often lives in the minds of markets between Fed and BoE. Volatility was a bit higher in EUR/GBP than in the past days, the pair closed at 0.7882, near the 0.7888 close on Wednesday.

Overnight, UK consumer confidence (October) was reported marginally lower, but it shouldn’t have impact. The BOJ decision caused some volatility also in non-yen crosses. So, in lockstep with EUR/USD, EUR/GBP slid somewhat lower trading currently at 0.7868, still in the established narrow trading range (0.7860-0.7912). For today, we suspect that developments in the main crosses will be the main impetus for EUR/GBP trading. If the dollar rallies, there might be some filtering through gains for sterling. However, we are a bit sceptical about the dollar and thus favour more consolidation for EUR/GBP.

Of late, we had a sell-on upticks approach for EUR/GBP. We maintain the view that the trend in EUR/GBP stays downward longer term. Short-term, the trend shows signs of fatigue. The 0.7850/0.7755 is a tough support, key resistance stands around 0.8066. We have a neutral approach on EUR/GBP short-term.