USD/JPY decline blocked on intervention speculation

This morning, Asian equities lose moderate ground, more or less in line with the US yesterday. Japan underperforms (Topix is losing-4.5%) as Japanese markets had some catching up to do after yesterday’s closure. There is plenty of market speculation that Japan might be close to interventions. BOJ’s Kuroda and PM Abe met to discuss the economic situation. Fin Min officials described the currency moves as rough and said they were monitoring the FX market with a sense of urgency. Fin Min Aso indicated that the MOF would take appropriate action if needed. At the same time he said to seek G20 coordination to address the recent turmoil. In nervous trading, USD/JPY ‘stabilizes’ in the lower half of the 112 big figure. EUR/USD is holding relatively stable near 1.13.

Today, the first estimate of EMU Q4 GDP will be published. The consensus expects 0.3% Q/Q and 1.5% Y/Y. We see slight upward risks for growth. If so, it might be a positive for the euro, but we don’t expect it to be a game changer.
The focus is on other drivers of market stress, not on European growth. In the US, the retail sales are expected at a soft 0.1% M/M (0.3M% for the control group), but with upside risks; Michigan confidence is expected marginally higher at 92.3, but with downside risks. Of late, eco data were only of second tier importance for FX trading. The internal market dynamics (risk-off) was the key driver. Can eco data combined with other factors gradually bring markets to a short-term equilibrium? We think the market nears some kind of exhaustion and consolidation. It is still only a working hypothesis. The reopening of mainland Chinese markets on Monday might still be a tricky moment. Such an easing of tensions is also an important factor to put a floor for the dollar.

Over the previous days, global markets showed diffuse, instable trading dynamics. It will take time for all this markets to find a new equilibrium. At the same time, US bond yields remain on a downward trajectory, but this move might slow. A sustained directional rebound of the dollar remains difficult in this context, even as Fed’s Yellen kept the door open for further rate hikes.
USD/JPY was vulnerable in this process, but interventions fears have block the downside. EUR/USD is setting minor new short-term highs, but the dollar losses against the euro remain limited. We look out for a topping out in EUR/USD.

From a technical point of view, EUR/USD broke above the 1.1060/1.1124 resistance area (15 Dec top: 62% retracement). This is a dollar negative. The short-term correction high stands at 1.1378. Next important resistance kicks in at 1.1495.The jury is still out, but we are looking for a topping out in EUR/USD.
USD/JPY dropped below the key 115.98 pre-BOJ correction low. This was high profile warning signal. We expect the BOJ to send further warning signals. This might put a floor for the USD/JPY short term. However, there is no good reason to fight current yen strength as long as global uncertainty persists.

Sterling declines, but closes off the intraday lows

The global risk-off trade weighed again on sterling, in the absence of UK eco news. EUR/GBP set a new correction top just below 0.79, but the pair returned part of the early gains in line with EUR/USD. The pair closed the session at 0.7822 (from 0.7775). Cable lost more than one big figure, but also closed the session off the intraday lows at 1.4477 (from 1.4522).

Today, only the UK December construction output, not a market mover, will be published. There are some tentative signs that global risk sentiment might be less negative at the start of the European trading session. If confirmed, this should slow the sterling sell-off in a daily perspective. However, we see only limited room for a sustained rebound of sterling. The most recent headlines on the Brexit-negotiations suggests some obstacles in the process. The issue will become even more important next week as the EU summit nears. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Next big resistance stands at EUR/GBP 0.7854/75. A return below EUR/GBP 0.74 would be a first indication that sterling enters calmer waters.

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