Forex - The Bank of Japan held its overnight rate steady at 0.10%

Forex News and Events:

Two central bank meetings had already taken place before European desks even opened today (BoJ and RBA), but the outcomes have been largely in accordance with expectations. Unsurprisingly, the Bank of Japan held its overnight rate steady at 0.10%, but Governor Shirakawa and his colleagues failed to exploit this opportunity to influence the rapidly appreciating JPY to any noticeable degree. In fact, the ensuing press conference presented very little which we have not heard before; repeated statements that the BoJ is closely watching impact of a strong JPY on economy were followed by the comment that monetary authorities cannot manipulate FX rates – hardly the sort of talk likely to compel JPY bulls to ease off the accelerator. We still suspect that the next big move in Japan is more likely to come from the MoF rather than the BoJ; and therefore we are still cautious that surprise currency intervention is a very real threat, even if today’s proceedings do not suggest it is an imminent one.

Shortly after the Japan rate announcement we also heard the latest decision from the RBA, and once again the benchmark interest rate was left unchanged at 4.50% for a fourth straight month. The board retained an upbeat view of the economy that suggests room for one further hike before year end, but this measured pause in tightening does at least give the RBA flexibility to react to any potential soft patches in the global recovery – a valuable option given the considerable risks prevailing in the economic outlook. Admittedly, AUDUSD has come off from its highs of 0.9179 to trade below 0.9100; but this sell-off seems to be more about the parallel sell-off in EURUSD and other risk correlated trades in general, rather than an AUD-specific reaction. We still feel that domestic data is robust enough to suggest the recovery is well entrenched and will weather most scenarios well; second quarter GDP hit a much better than expected 1.2% QoQ (3.3% YoY) – and indeed there were upward revisions to last quarter’s data. Latest retail sales figures and construction data too point to healthy growth. The wobbles in employment figures and CPI are worth considering, but are by no means conclusive evidence of an imminent double dip.

With those central bank events out of the way, the economic schedule for the rest of the day is light, with only German factory orders yet to come from the G10 (exp: 0.5% MoM, 20.6% YoY, prev: 3.2% MoM, 24.6% YoY).

Looking ahead, tomorrow will bring the third of this week’s four major central bank meetings as the Bank of Canada convenes to make their latest rate decision (the fourth being the Bank of England on Thursday). The BoC is the only G10 central bank we suspect will hike rates this week. The general consensus is that policymakers will raise rates 25 bps to 1.00%, however this is not a unanimous view. Of the 18 analysts surveyed by Bloomberg, 5 are expecting no change; the lingering concern appears to be that the US recovery is still quite fragile and that divergent policy on the North American continent could harm both Canada and the US – a fear that may keep the BoC from tightening. Nevertheless, given the steady improvement in Canada data there is clear scope for additional hikes, and we therefore expect CAD appreciation over the short-to-medium term.

Today's Key Issues (time in GMT):

12:00 EUR GER Factory orders (Jul), exp: +0.5% m/mm, prev: +3.2%.

The Risk Today:

EurUsd The 1.2930 resistance level proved to be too daunting a challenge for EURUSD’s corrective rally on the first attempt, with the pair inching only as far as 1.2920 before turning back and running scared towards 1.2780 once more. From here, the directional bias is pretty neutral in the short-term; with an excruciatingly light data calendar serving to exacerbate senseless range-trading games. We therefore look to exploit the 1.2780 pivot level by adopting the strategy of buying above it and selling below it, aiming for modest 80-100 pip gains in either direction. At present we lie right in the sweet spot between 1.2780-1.2800 so feel it’s an easy punt to go long (with a stop at 1.2760), looking for a target around 1.2900 (again being cautious to avoid that significant 1.2930 resistance). Should the pair break below 1.2780, then expect a quick liquidation of longs to ensue; we recommend setting a stop just through 1.2810-20 and aiming for a target of 1.2680 (coinciding with the 100-day moving average). The broader range we are trading in of late is roughly defined as 1.2588 – 1.2930 (where 1.2588 is the 24 Aug low), but it’s also worth noting weak intra-range support lies at 1.2625 (31 Aug low).

GbpUsd Much as we anticipated yesterday, the range-trading environment prevails in GBPUSD; with the failed attempt to break above 1.5490 leading to a rapid collapse back towards the lower end of the 1.5325 – 1.5580 range. With downtrends still in vogue at the moment, there is clearly scope for an extended move through 1.5325, so look for next levels to coincide with 1.5265-90 (trendline support), 1.5235, and then major support kicks in at 1.5115-25 (50% fibonacci level and 21 Jul lows). For the bulls to buck the trend, they will first need to conquer 1.5490, then 1.5580 (23.6% fibonacci retracement of 1.4229 – 1.6000), but then the way is clear for a test of major resistance at 1.5715.

UsdJpy This morning’s BoJ meeting presented absolutely nothing new or compelling to suggest intervention is any closer to materializing; in turn, the market has expressed its skepticism by buying yet more JPY and pushing USDJPY back towards the critical low of 83.60 (24 Aug low). This 83.60 support has admittedly managed to repel one sell-off attempt already on 1 Sep (which then led to a bounce up to 85.20), but we see this renewed test as a sign that a potential descending triangle may be about to come into play on the hourly chart. Should 83.60 break, the theoretical triangle target we’d be aiming for would be at 81.35. We have re-adjusted our trendlines to incorporate the most likely 2-month downtrend, and therefore see some weak support likely at the lower edge of that downtrend around 82.75. That however, is as much help as the bulls can expect, because below there is a barren wilderness untouched since 1995. Our short-to-medium term target (barring the possibility of physical BoJ intervention) is therefore the 79.75 – 80.00 area where the pair bottomed out on that run 15 years ago. On the topside the key levels of note are the 85.22 peak from Friday, major resistance at 85.90 and 86.50 (5 Aug high).

UsdChf The steady descent continues in USDCHF (despite this morning’s Swiss unemployment figures failing to meet expectations) as the 1-month downtrend directs the majority of the price action lower. Next level on the downside is the 1.0065 low from 1 Sep, but in truth we still think that a return to parity is inevitable. Certainly the relative fundamental analysis supports a move lower for the pair, and indeed our technical analysis can only offer a few remaining supports at 0.9960 (3 Dec 2009 low) and 0.9920 (26 Nov 2009 low) before USDCHF enters new territory and much greater scope for further CHF strength. Expect rallies to be hindered by resistance through 1.0185, and 1.0240 where the rally came to an abrupt halt on Friday. Extended rallies likely to be blocked by 1.0550 (13 Aug high), 1.0640 (27 Jul high), and 1.0675 (200-day moving average).

Resistance and Support:

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot