Harry Hindsight always gets it right but yesterday’s ridiculous over-reaction to the BOJ Governor reports showed that the EUR/JPY market had simply started to lose control. EUR/JPY rallied from a NY close near 123.15 to highs at 125.30 on news that was in no way surprising or unexpected and in a market which was already long to bursting point. Once the Italian election results started flowing in, and this was always a downside-risk event, the massive longs built up over the last few months started to exit.
We now need to look to the daily EUR/JPY chart for some support levels (see chart) with the 55-day MA at 118.25 and a 38.2% retracement at 117.25 offering the first levels of support. Initial resistance will probably be firm at the psychologically important 120.00 level. Prime brokers reported massive selling from CTAs and hedge funds.
USD/JPY has similarly broken through some major support at 92.00/25 and there isn’t really any major technical support until 89.00 (see chart). Look to the Nikkei for leads today as it could be in line for a major correction also.
EUR/USD has also broken below an important Fibo support level at 1.3070 (see chart) although I would like to see some additional confirmation before declaring it broken. The Italian election set-off the EUR selling but over-positioning in EUR/JPY was a bigger factor.
Sterling and CHF took a back seat, with both currencies making decent ground across the board as adjustments in the crosses took precedence. EUR/CHF triggered stops below 1.2250 and EUR/GBP made a new high before reversing sharply.
The AUD was completely sidelined in a tight range and any likelihood of volatility would seem to come from AUD/JPY during Asian trade. If the Nikkei gets thrashed and AUD/JPY trailing stops get triggered, then we could see AUD/USD testing 1.0200 pretty soon.
Good luck today and be careful out there.