Can USDJPY Hold Support at 78.00?

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Market Drivers September 10, 2012
Currencies consolidating in quiet trade ahead of busy week
Japanese GDP marked down by half on year over year basis
Nikkei off -0.03% Europe -0.23%
Oil $96/oz.
Gold $1736/oz.

Europe and Asia:
AUD New Homes -1.0% vs. -.1%
JPY Current Account .34T vs. .39T
JPY GDP 0.2% vs 0.3%
EUR French IP 0.2% vs. -0.5%
EUR Sentix Sentiment -23.2 vs. -30.4

North America:
Consumer Credit 3:00

Not much action in currency markets at the start of what promises to be a very busy week with key event risk on both sides of the Atlantic as traders focus on the German constitutional court ruling on the ESM and the FOMC meeting which may bring another round of QE to US. The EURUSD was slightly lower in morning European dealing with mild profit taking kicking after Friday’s massive 200 point rally that took the pair through the 1.2800 handle.

The economic calendar is relatively barren but there were two bits of data out of Europe that provided a small measure of solace to the bulls. French Industrial Production unexpectedly rose by 0.2% from -0.5% eyed. The manufacturing sector alone–which excludes output from the energy industry and mines–posted a much faster 0.9% increase.

In addition sentiment in the EZ rose to -23.2 from -30,3 the month prior improving for the first time since March as aggressive action by the ECB president Mario Draghi helped to calm credit markets in the region. The expectations sub-index rose -10.8 from -23.3 for the second consecutive month indicating that for now at least the crisis in investor confidence may have peaked.

With little on the US calendar today prices may continue to meander for the rest of the day. With Euro overbought on the short term time frame the pair may see further profit taking as the day proceeds especially with some doubts lingering regarding the Constitutional court ruling. German finance minister Shauble state that he is still confident that the court will approve the ESM mechanism, but other politicians in Germany are arguing that the latest OMT proposal by the ECB violates the central bank’s charter.

In the meantime with QE3 fears on the rise, USDJPY has been negatively affected in the aftermath of the lackluster NFPs as the pair has slipped towards its long term support near the 78.00 level. If the Fed does push for further monetary stimulus, the pair may trade down to 77.50 but at those levels would likely invite intervention from the BOJ. The strength of the yen has been a major headwind for the Japanese economy as today’s disappointing GDP figures show and policymakers are unlikely to tolerate further appreciation for much longer. On the other hand, if the Fed remains stationary the pair could see a burst higher through the 79.00 figure and possibly a run towards psychologically key 80.00 handle as the risk of QE3 is lifted.

Boris Schlossberg
Managing Director

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