USD is now cheaper to borrow than the JPY

Fri, Aug 28 2009, 10:45 GMT
by Per-Erik Karlsson

Market comment 

S&P 500 futures chart showing some weakness over the last 2 days and could signal a correction, however we don’t go short just yet, we want to see a confirmation signal and that has not happened yet. JPY trading stronger across the board last few sessions and the correlation with equities have faltered over the last week. We had expected to see our risk parameter EURJPY trading towards 139 as S&P broke 1020. However this has not happened and we pay attention to the fact that somebody is supporting the JPY. Seems like a potential shift of focus in the FX market, moving away from the risk appetite theme that has been the dominant force this year to a theme of interest rate differentials. Not convinced that this shift will remain in place, but at the moment it seems to be the main driver as in fact JPY has several other currencies that can take it traditional stance as carry trade currency. USD is now cheaper to borrow than the JPY, first time in 16 years.
The Japanese election over the weekend could also be a supporting factor for the JPY. We don’t see a change of powers (Prime minister Aso loosing the election) to be positive for the JPY. The fundamentals are in our opinion not good enough for the JPY to rally much below 90 in the medium term and expect to see it move towards 100 to 105 later this year. Nat gas continues to fall and fall, but the chart is now showing some potential strength, we continue to monitor for a long entry. We expect Crude oil to be driven largely by the equity price action. VIX is moving towards 29 in the September futures contact this morning and seems to be pretty bid every time equities fall back. We still favor buying VIX on dips for a move higher above 30 once traders return from the summer holiday. Still a lot of traders that are looking for a correction lower in equities once summer holiday is over and we agree.

Some interesting news stories:

Technical’s

Euro: Key support remains at 1.40, with minor support at 1.4046 (weekly low). Still expect 1.40 to hold as long as S&P stays above 970. See resistance at 1.4350 and 1.4450 today.

Cable: Looking weak as it broke below 1.6270 yesterday, however it closed well of the lows, so somebody bought into that weakness. Resistance at 1.6593 and 1.67 today. Technically still long term bullish potential above 1.60.

USDJPY: Weak below 95 with support down at 94 and 93.20. Favor weaker JPY in the longer run, but as long as it trades below 95 we favor staying short.

Swissy: Range bound with support down at 1.0540 with resistance up at 1.0910. Favor range trading in this mentioned range until proven wrong. 

AUDUSD: Key resistance at 0.8550 and key support down at 0.8150 level. Bullish above0. 8150 basically. A daily close below 0.8150 would be a bearish signal.

USDCAD: Choppy price action as risk appetite and crude oil seems to drive price action. Technically weak below the falling trend line going back to 9th of March, coming in at 1.1164 today.

EURJPY: Strong support down at the 132 to 133 support zone. Looks bullish as long as S&P 500 stays above 970 and key support in the EURJPY at 132.

GBPJPY : GBP being sold across the board as EURGBP broke above 0.8630 last Friday. Support down at 150.89 (7th of May high and previous break out level)

AUDJPY: Key pivot point is 76.65 and basically medium term bullish outlook intact above this level.

Our outlook

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