EURUSD in key zone of resistance now

EURUSD is in a key zone of resistance up toward 1.3170 ahead of the ECB meeting Thursday. Meanwhile, where should we look for support in USDJPY after Aso comments failed to weaken JPY further?

Japan’s Finance Minister says govt to buy ESM bonds
Japan’s Finance Minister Taro Aso said overnight that Japan would use its FX Reserves to the buy Euro Zone’s ESM bonds. This saw quite a spike in EURJPY overnight, but one that failed to hold – an interesting example that JPY crosses are trying to carve out a new range after the tremendous move of the last three weeks. Aso also indicated that Japan needed to get itself on a sustainable fiscal footing and that it wasn’t up to the Bank of Japan entirely to deal with the unemployment rate. He said over the weekend that the government will not insist on a written accord with the Bank of Japan on an explicit inflation target, which represents a backing off of the strength of campaign rhetoric from the party leader Abe. Interestingly, Aso commented that the coming BoJ chief should have a foreign language ability.

Chart: USDJPY
Where do you look for support when you’ve a move like we’ve seen in USDJPY that pulls it so far away from previous trading ranges? No easy answers, but previous areas of accumulation, Fibonacci’s and Ichimoku tools might offer a few clues. The first area of support is the one that offered support late yesterday at 87.25, this is where the first spurt of buying found pause in the first trading days of 2013.

Below that we have the 0.382 Fibo of the move from the 84-ish start to the last leg of the rally, though I would say that the rally base is more convincing from the late November start (from sub-82), which gives a 0.382 Fibo of 85.83 (shown on chart below). Perhaps more compelling are the two Ichimoku daily lines now that the hourly Ichimoku has a mostly bearish setup, with the first Tenkan line (bright red) coming in at 86.53 presently and the Kijun coming in just above 85.00. The ultimate structural support is the flat line support of the 84.50 area, which was the key resistance taken out on the way up.

Italy’s Berlusconi preps for election
Yesterday, Silvio Berlusconi announced a deal with the rightwing Northern League in an attempt to bolster his party’s chances at influence after the upcoming election. The condition for the deal is apparently that Berlusconi won’t seek to become prime minister in the event his party is part of the government coalition. This is perhaps a realist move aimed at getting as much influence as possible as the former Italian head of state realizes that his popularity was too low to offer any chance of a broader election victory. The fact that he is now even less likely to become prime minister is perhaps a Euro positive, but some commentators suggest that the deal raises the likelihood of a lack of a clear political leadership if no solid coalition emerges. Remember that Italy and Spain have very heavy debt issuance needs this quarter. Italy is set to auction bonds this Friday and Spain will sell a variety of bonds from 3 to 13 years term on Thursday.

Aussie Trade Balance – unpleasant reminder Down Under
The Australian trade numbers (-2.6B deficit for November, the worst since 2008) are a reminder that the country has a long-standing current account deficit that has been covered by foreign investor interest in the country due to its raw materials potential and its relatively high interest rates. Let’s remember that the accumulated total of this current account deficit is on the order of 100% of Australia’s GDP. So yes, all is good as long as the flow is good, but if foreign capital is ever spooked, there’s a huge reality gap awaiting closure somewhere out there on the mist-blurred horizon.

Looking ahead
It’s still all about the ECB meeting on Thursday. The key zone of resistance is already here in EURUSD here between 1.3110 and 1.3170 as we position for that meeting, with the overnight high a level traders may look to use tactically to test the downside argument. US economic data is virtually nonexistent until Friday’s Trade Balance data. The next focus across markets is likely to be US earnings reports that being at the end of this week and discussion of how the end of the payroll tax cut and other fiscal cliff deal changes (not to mention the unknown of the next round of fiscal talks) will affect company earnings. Complacency still appears dangerously high, the question is what will provide the catalyst.
Stay careful out there.

Economic Data Highlights

• Australia Dec. AiG Performance of Construction Index out at 38.8 vs. 37.0 in Nov.
• UK Dec. BRC Sales like for like out at +0.3% YoY vs. +0.5% expected and +0.4% in Nov.
• Australia Nov. Trade Balance out at -2637M vs. -2300M expected and -2443M in Oct.
• Switzerland Dec. Unemployment Rate out unchanged at 3.0% as expected
• Germnay Nov. Trade Balance out at +17B vs. +15.8B expected and +15.7B in Oct.

Upcoming Economic Calendar Highlights (all times GMT)

• Sweden’s Riksbank releases Monetary Policy Minutes (0830)
• Norway Nov. Industrial Product Manufacturing (0900)
• Euro Zone Nov. Consumer Confidence (1000)
• Euro Zone Nov. Retail Sales (1000)
• Euro Zone Nov. Unemployment Rate (1000)
• Germany Nov. Factory Orders (1100)
• US Dec. NFIB Small Business Optimism (1500)
• US Nov. Consumer Credit (2000)
• US Fed’s Lacker to Speak (2000)