Has USD/JPY Topped Out For Now?

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Market Drivers for Jan. 21, 2013
Yen cross profit taking dominates open
US markets closed today
Nikkei -1.52% Europe 0.24%
Oil $95/bbl
Gold $1689/oz.

Europe and Asia:
EUR German PPI -0.3% vs. 0.0%
GBP Rightmove 0.2% vs. 3.3%

North America:
US markets closed
CAD Wholesale Sales 8:30

Trading has been dominated by profit taking on yen crosses on the first day of the week in what otherwise has been a pretty lackluster session so far with little fresh newsflow. USD/JPY opened trade by gapping higher as it hit yet another yearly record at 90.25, but selling by real money accounts quickly capped the gains and the pair came under heavy liquidation for the rest of Asian and European trade.

The market is focused to tomorrow’s BOJ meeting and the presser to follow. For the first time Japanese monetary and fiscal authorities will hold a joint press conference to reaffirm their commitment to stimulate the economy by targeting the inflation rate to 2%. Despite the assurances that the BOJ is on board with Prime Minister Abe’ s aggressive plan to jumpstart the deflation plagued Japanese economy, its is difficult to see just how the BOJ plans to accomplish this task.

Tomorrow’s presser may be long on rhetoric but short on policy action, in which case the market may sell USD/JPY further as profit taking accelerates. 90.00 was the target set by PM Abe, and after such a fast and furious rally it is only natural for the pair to correct its overbought condition. We have previously noted that last week marked the 10th straight up week for USD/JPY – an extremely rare occurrence that begs for some profit taking correction.

On the other hand if BOJ surprises the market with an uber aggressive plan to expand QE and other measures to spark inflation, demonstrating a serious intent to move price levels towards the 2% target, then we could see a fresh new high in the pair as shorts will quickly cover their bets.

In other news the UK Rightmove HPI rebounded to positive territory at 0.2% from -3.3% the period past and cable, after hitting yet another yearly lower at the start of trade, rebounded towards the 1.5900 level. GBP/USD has been the weakest of the majors for the past several days as worries over the risk of triple dip recession and possible downgrade of UK debt have put relentless downward pressure on the unit. The near term trend for pound remains to the downside, but today the pair is benefiting from some short covering and showing relative strength. Still unless it can retake the 1.6000 level the longer term bias remains bearish.

In North America today, capital markets are closed for MLK holiday so trading is likely to be quiet amidst relatively thin market conditions. The only newsflow comes out of Canada where wholesale sales are expected to decline to 0.5% from 0.9% the month prior. The Canadian dollar after exhibiting nearly unshakable strength for the past month, showed the first signs of weakness on Friday as USD/CAD rose above the .9900 level. Of today’s data disappoints the pair could rally to .9950 as the correction in the loonie continues.

Boris Schlossberg
Managing Director

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