23 February 2010 at 14:35 GMT
FX Update: Is the USDJPY rally history?
Market comment
Since rallying to within arm's reach of the 200-day moving average late last week on the Fed's discount rate move, USDJPY has been consolidating lower, as risk appetite has failed to follow through the key pivot area we find ourselves in, and as treasuries have managed to rally again. The next 36 hours will tell us whether this USDJPY rally will bite the dust with the Bernanke testimony on tap tomorrow. If Mr. Bernanke manages to assuage to further assuage expectations for rate increases in the future, and bonds manage to rally once again, then the USDJPY rally is likely a thing of the past. The flipside of that scenario is also a possibility if Mr. Bernanke's rhetoric and bond auction results this week see a rise in yields. A major resistance area in the benchmark US 10-year yield is in play this week, as can be seen in the chart below. Four percent yields on the 10-year would obviously be a big deal. On the second chart we compare USDJPY with US 10-year yields.
Another factor supporting the JPY overnight was the Bank of Japan's recent meeting minutes, which focused on maintaining the confidence of the market rather than the launching of any new QE measures. Some policy makers said "it had become all the more important to maintain market confidence in the conduct of both fiscal policy and monetary policy". At the same time, Japan's government was out fretting deflation, unemployment and weak global growth as potential hampering the weak economic recovery and called on the BoJ. to do more to fight deflation.
Euro
A Euro rally attempt was wiped out in early European trading by a lower than expected IFO reading. The expectations component was actually slightly higher, but the ugly current situation reading dragged the index lower for the first time in almost a year. The poor reading had no apparent effect on Greek debt spreads, which have come off slightly over the last couple of trading days. The IMF said that it sent staff members to Athens for assistance on the request of Euro and Greek officials.
The march of the BoE
Mr. King tried to put a brave face on the situation in the UK, essentially saying that things are under control, that inflation isn't likely to be a worry, but it is the BoE's job to do something about it with rate hikes if it proves a problem. His an other's generally positive comments on the weak pound are obvious signs that the bank is more than happy to see the pound weaker (if it gets much stronger than the Euro, in fact, they might need to change their rhetoric to discussing the implications of the strength of the pound.) Sterling was sharply weaker in the initial phases of the BoE testimony, as the BoE's Dale is an obvious dove who encouraged the idea of further asset purchases. But in the wake of the testimony, the EURGBP rally proved short lived and the 200-day moving average remains intact, making a short tempting for traders here looking for another challenge of the 0.8650 support. Considering the BoE's testimony, the pound strength looks especially impressive.
Chart: EURGBP
The critical 200-day moving average is still intact and the market is now presented with an interesting bearish pattern to look at renewed short positions.
Looking ahead
We are still in this critical pivot zone for risk. Early indications are today that the resistance is still holding, so we look for . Tomorrow is when the real fireworks potential starts, with Bernanke's testimony that comes as US treasuries are trading at a critical level and the us yield curve is exhibiting record steepness. Will Mr. Bernanke's testimony calm the long end or add fuel to the fire? That is the key question for the USD and the JPY.
Also watch out for the US Consumer Confidence number out very shortly and the weekly ABC confidence survey out later in the day. For USDCAD, watch the weekly US supply data over the next couple of days. US supplies are extremely plentiful, so oil may be driven by geopolitical fears. Also watch for the results of the 2-year t-note auction today, which may not be stellar considering the low yields and the upcoming Bernanke testimony.
Economic Data Highlights
- Switzerland Jan. UBS Consumption Indicator out at 1.36 vs. 1.195 in Dec.
- Germany Feb. IFO Business Climate survey out at 95.2 vs. 96.1 expected and 95.8 in Jan.
- UK Jan. BBA Loans for House Purchase dropped to 35.083k vs. 43k expected and 45.65k in Dec.
- US Dec. S&P/CaseShiller 20 City Composite Home Price Index fell -3.1% YoY as expected and vs. -5.3% in Nov.
Upcoming Economic Calendar Highlights
- US Feb. Richmond Fed Manufacturing PMI (1500)
- US Feb. Consumer Confidence (1500)
- US Weekly API Crude Oil and Product Inventories (2130)
- US Weekly ABC Consumer Confidence (2200)
- US Fed's Bullard to Speak (2205)
- Australia Dec. Conference Board Leading Index (2300)
- Japan Jan. Corporate Service Prices (2350)
- Japan Jan. Merchandise Trade Balance (2350)
- Australia Q4 Wage Cost Index (0030)
- Japan BoJ Deputy Yamaguchi to Speak (0130)
- Japan Feb. Small Business Confidence (0500)