Market Focuses on Japanese Elections

Forex News and Events:

Europe has been unable to sustain the optimism generated by Chinas strong HSBC flash purchasing managers' index read which hit a 14-month high of 50.9 (expansionary territory). This was the fifth straight monthly increase indicating that Chinese power house manufacturing sectors are clearly recovering. The erosion in risk appetite was parity due to European PMI which generally increased but remain squarely below the 50 threshold. With Japan heading into Sunday elections, the JPY continues to be sold (especially as a funding currency for carry trades). Should the LDP win it reinforces the JPY bearish trend, given the increased likelihood of the aggressive monetary and fiscal policy advocated by LDP President Abe being realized. USDJPY was bid again in Asia as the pair continued to grind higher to 83.75. Reinforcing the selling, the JPY story was weaker than expected, Tankan large manufacturer index that fell -12 vs. -10 exp from -3 prior read. The worrying trend of downside surprise will surely give the BoJ the justification they need for additional and aggressive easing. As for this weekend, elections and the vote in the Lower house will close at 11.00gmt (with results being officially announced 4 hrs later). In order to keep the USDJPY bulls from liquidating JPY shorts the LDP (Abe) / New Komeito coalition needs a sweeping victory. The new wires indicate that President Barack Obama and House of Representatives Speaker John Boehner held face-to-face meetings yesterday in order to overcome the current deadlock and avert the 'fiscal cliff' of $600 billion of tax hikes and spending cuts. However, there is little indication that either party is budging and a pre end of the year deal is likely. Given these drivers we would watch for USD to remain weak through the new year and traders to continue to favor carry trades. In Switzerland yesterday, the SNB's December Monetary Policy Assessment went according to our general expectations, with the 3m CHF Libor target band of 0.00-0.25% and minimum exchange rate in EURCHF left at 1.200. We would expect the EURCHF to continue to deprecated back to 1.2060 (pre SNB meeting speculations level). In the UK The GBP declined as Chancellor Osborne did not rule out changing the monetary regime and dropping the 2% inflation target, adding that it had no plans to do so. Further, BoE Markets Director Paul Fisher reiterated his view that the BoE was likely to need to expand its asset purchase program in the future, though less likely given the current level of inflation. The economy remains on weak footing in the UK, with manufacturing continuing to contract. In the coming session we have US Industrial production and Capacity utilization. While in Canada we get Manufacturing Sales.

Today's Key Issues (time in GMT):

2012-12-14T13:30:00 USD Nov CPI, -0.2% m/m, +1.9% y/y exp, prior +0.1%, +2.2%.
2012-12-14T13:30:00 USD Nov - core, +0.2% m/m, +2.0% y/y exp; prior +0.2%, +2.0%.
2012-12-14T13:58:00 USD Dec Markit mfg PMI - flash, 52.0 exp, prior 52.8.
2012-12-14T14:15:00 USD Nov industrial production, +0.3% m/m exp, prior -0.4%.
2012-12-14T14:15:00 USD Nov capacity utilization, 78.0% exp, prior 77.8%.

The Risk Today:

EURUSD EURUSD has rallied to 1.3117 but currently lacks the momentum to hit our1.3144 target just yet. Given the bullishness in momentum indicators we would suspect the pair to get comfortable above 1.3100 before mounting a solid challenge. That said, yesterday’s Doji and triple top on the 30 minute chart could indicate s sudden bearish shift near term. The first level of resistance are located at 1.3120/25 (5th & 14th Dec high) 1.3144 (17th Oct high), 1.3284 (1st may high) then 1.3387 (27th Mar High). The next support is located at 1.3100 (psychological support), 1.2931 (11th Dec low), 1.2878 (7th Nov reaction high), 1.2781 (200d MA), 1.2722 (13th Nov pivot high), 1.2630/62 (3rd July high & 100d MA), 1.2463 (31st Aug low), and 1.2386 (14th & 17th Aug high).

GBPUSD GBPUSD has corrected lower after a strong 1-month rally drifting to 1.6084 low. Earlier, the pair reached 1.6172 just a few pips short of critical resistance. Momentum indicators have turned bullish and Mondays bullish engulfing pattern was clearly constructive, we would like to see a break of 1.6179 to extend strength to 1.6220. Watch for next resistance to come into play at 1.6179 (1st Nov high), 1.6310 (21st Sept high) and 1.6454 (29th Aug ’11 top). The support zone is located at 1.6071 (7th Dec low), 1.5958 ( 28th Nov. low), 1.5930 (100d MA), 1.5826 (15th Nov low) 1.5745/53 (30th July pivot), 1.5665 (uptrend channel floor), 1.5564 (8th Aug low), 1.5656 (intraday low),1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low).

USDJPY USDJPY bullish rally remains intact. This week, USDJPY broke its recent 2-week consolidation range upper threshold and took out the downtrend channel top (from April ‘11). The JPY sell-off has been triggered by the rally in risk and expectations of Sunday domestic election (an potential for a “new BoJ”). As stated with a solid close above 82.84 would trigger a move to 84.17. Above us, solid resistance remains at then 84.17 (15th March high) then 85.75 (2011 peak). On the downside, some support is eyed at 83.14 (downtrend top), 81.50/69 (15th Nov. high & 28th Nov. low), 81.00 (16th April pivot), 79.06 (9th Nov low), 78.75 (8th Oct high), 77.94 (Symmetrical triangle floor), 77.12 (13th Feb low) then 76.03 (3rd & 17th Jan low).

USDCHF USDCHF has taken a backseat to price action in the EURCHF but USDCHF feels significantly bearish. The pair looks to have fall back into its 1-month downtrend channel yesterday, as buying interest quickly evaporated, and the pair dropped back down to 0.9244 levels. With the pair back into the downtrend and momentum indicators turning bearish we would look for a break of 0.9211 in the near term. The first levels of support should be located at 0.9211 (17th Oct low), 0.9194 (7th & 11th May low), 0.9100 (11th May high) then 0.9041(1st may low). The next levels of resistance are located at a distant 0.9383 (7th Dec high), 0.9424 (200d MA), 0.9457 (21st Sept high), 0.9515 (13th Nov high & uptrend top), 0.9610 / 20 (26th Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), and 1.0000 (psychological resistance).

Resistance and Support: