الخميس، 27 سبتمبر، 2012

Yen Correction on the Horizon?

  • Yen continues to weaken at relentless pace
  • US Treasuries clear key technical level
  • Investors starting to anticipate Fed policy shift
  • EURCHF on the move; SNB rate decision to be digested
Any indications of a technically overbought USDJPY market are useless, with the pair relentlessly pushing higher to leave hourly, daily and weekly studies all highly stretched and begging for a pullback. However, these technical readings have been looking like this for several sessions already and the market couldn’t care less. We have been talking of a major structural shift in this major for some time now and had been looking for the formation of a major longer-term base by the record lows at 75.50 from October 2011. Things have been playing out nicely, although at this point, it would be reassuring to see a bit of a healthy corrective pullback before a resumption of the newly adopted uptrend. The weekly chart offers the most compelling evidence for the onset of a bullish medium and longer-term shift in the trend, with the market recently closing above the weekly Ichimoku cloud for the first time in nearly 5 years. As such, the risks are tilted to the upside and we would not rule out the possibility for a move all the way back towards 100.00 in the months ahead. But once again, we would be most comfortable to see a pullback into the 80.00-82.00 area to allow for stretched technical studies to unwind. Parabolic, one way price action is never healthy and it is better for the market to trend in a more orderly fashion.
Certainly the dramatic shift in the construct of the US treasury markets has also influenced the rally in USDJPY, with 10-year yields jumping back above the 100-day moving average for the first time in nearly nine months. The Fed’s recent acknowledgment of improvements in the labor market could be influencing the price action and investors could now be starting to position for the onset of a less accommodative Fed policy going forward. For now, equity markets have been less sensitive to these subtle hints from the Fed, and remain exceptionally well bid to fresh 2012 highs. However, we feel that equities are far too ahead of themselves at current prices and would soon expect to see a similar response which would open a good amount of profit taking over the coming days. For us, the bottom line is that equity markets are simply not reflective of underlying fundamentals at the moment, and the idea that we have retraced some 85% of the move from the record highs to crisis lows is a little unnerving. The irony is that equity markets have been responding to ultra accommodative Fed policy, but the ultra accommodative and prolonged accommodation also sends a message that things are still not that great. So again, why are equity markets so well bid?
Moving on, another interesting development in the FX world has come from the EURCHF cross rate which is finally starting to move after weeks of barely any movement. The cross had been locked in a single digit range by 1.2050 and just over the 1.2000 SNB floor for several weeks, before finally breaking out back above 1.2100 on Wednesday. Indeed, the thought of buying crossed our minds many times while the market was trading 1.2050 given the very publicized 1.2000 SNB floor, and positive yield differential, but we could not pull the trigger as the trade simply seemed too good to be true. But it was no so, and anyone who bought at 1.2050 is now reaping the rewards. From here, we could still head significantly higher and the long trade is still a possibility, but with the SNB rate decision to be digested today, we will again stick to the sidelines and not look to chase trades.

ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: Last Friday’s aggressive pullback strengthens the prospects for the end of a corrective move in 2012 which has in fact stalled just ahead of 1.3500. From here, the risks are tilted to the downside and a break below next key support by 1.2975 will be required to officially put the pressure on the downside and open an acceleration of declines back towards the 2012 lows at 1.2620. At this point, only a break back above 1.3300 would alleviate downside pressures and delay outlook.
USD/JPY: The market is doing a good job of showing the potential for the formation of a major cyclical bottom after closing above the weekly Ichimoku cloud for the fist time since July 2007. This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming weeks. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond 84.00 over the coming sessions could prove hard to come by with shorter-term technical studies needing to unwind from their most overbought levels in over 10 years before a bullish continuation. As such, we would caution buying breaks above 84.00 for the time being and instead recommend looking for opportunities to buy on dips towards 80.00-82.00.
GBP/USD: The market has been costly confined to trade between the 100 and 200-Day SMAs since early February and the latest break back below the 100-Day SMA therefore suggests that we could be on the verge of a bearish break. The key level to watch comes in by 1.5600, and a break and close below this level will reaffirm bearish outlook and open the door for a more significant bearish decline towards the 1.5000-1.5300 area further down. Inability to establish below 1.5600 however, will suggest that more choppy directionless trade is in the cards.
USD/CHF: Setbacks have stalled for now just ahead of 0.8900 and the market could finally be looking to carve the next medium-term higher low ahead of a bullish resumption and eventual break back above 0.9660. The latest break back above 0.9300 helps to confirm bullish outlook and should now accelerate gains. Ultimately, only a drop below 0.8930 negates and gives reason for pause.

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