Is the Goldilocks trade back on? While longer-term global growth and macro trends argue otherwise, a dovish FOMC and a dip in 10-year US yields has sentiment on the rise in the short term.
Article / 14 January 2013 at 9:42 GMT

JPY crosses heading for violent correction?

Head of FX Strategy / Saxo Bank

The move in JPY crosses went parabolic late last week and into today’s Asian session – this raises the risk that once a correction comes it will be a violent one. Also – look out for Bernanke out speaking in late US hours.

The Euro rally ended last week with a flourish and tried to carry through yet again this morning on a solid round of risk appetite in Asia, but EURUSD and other crosses got a bit of altitude sickness in the early going and have been forced to take a breather, especially with Bernanke out speaking late today (more on that below).

Inflection point here as we have a very sharp EURUSD rally to new highs while some momentum indicators are suggesting divergence because of the prior sharp sell-off. So we’re at an interesting inflection point yet again as the EURUSD looks at whether it can maintain the 1.3300 break this week. Bears will want a full retracement of last week’s rally before gaining any confidence as the previous sell-off to back below the 1.3170 did not serve as the hoped for reversal indicator. Otherwise, the default stance appears to the upside if the 1.3300 area is more or less maintained. If we're about to launch a third-wave in Elliott parlance, the next target would be something like 1.3690, though let's not get ahead of ourselves.


More Abe jawboning on JPY
Shinzo Abe is basking in the glory of the aggravated yen move weaker and overnight made another comment about the BoJ needing to establish a 2% inflation target in the medium term, rather than merely as a long term target. Let’s remember two things as we head into next Tuesday’s BoJ meeting. First, the BoJ chairman’s term does not end until April and second, the BoJ adopted a 1% target last February and has seen no progress toward that goal. The uncomfortable reality from here is that the 10% move weaker in the JPY is going to bring higher fuel and food costs, while weak global demand could prevent Japanese companies getting as much as hoped out of the weaker JPY in terms of foreign earnings. As well, if USDJPY trades near 100, that would represent a 33% devaluation from its 75 lows – Japan will need to be careful not to overdo things.

More tactically, from a technical perspective, the JPY move has gone parabolic in some crosses, which suggests to me that it is unsustainable in the near term and could be set for a rather violent correction, particularly given the lack of any reasonable consolidation on the way higher – the JPY crosses are a dangerous place for trading from either side – be wary of the volatility potential.

Looking ahead
All eyes on Fed Chairman Bernanke late today as he will be speaking at a “roundtable” event in Michigan that will not include a prepared text. Because of the off the cuff nature of the appearance, there is the chance that we might get a sense of Bernanke’s optimism or lack thereof on Fed policy from here or from the course he is hoping the Fed will be able to take in coming months (as the relatively strongly grounded rumor is that he will not be seeking a third term as the reappointment season approaches this summer). I recall at his most recent press conference (full transcript here) his fairly prominent mention of the worry of “unintended consequences” (page 7 and 8, in response to the question from CNBC’s Steve Liesman) of asset purchases made by the Fed. This got far less attention than it deserved. Judging from how the USD ended last week, the market seems to be betting that Bernanke will prefer to err on the side of dovishness, particularly given the rather sharp move recently in bond yields. That has certainly been the pattern, but the question of him preparing for his legacy should not be underestimated.

Up tomorrow we have a number of interesting US data points including the Jan. Empire Manufacturing Survey, and Dec. Retail Sales and PPI.

Economic Data Highlights

  • Australia Nov. Home Loans fell -0.5% MoM vs. +0.5% expected
  • Germany Dec. Wholesale Prices out at 0.0% MoM and +3.2% YoY vs. +3.2% YoY in Nov.
  • Italy Nov. Industrial Production out at -1.0% MoM and -7.6% YoY vs. -0.2%/-6.0% expected, respectively and vs. -6.1%YoY in Oct.

Upcoming Economic Calendar Highlights (all times GMT)

  • Euro Zone Nov. Industrial Production (1000)
  • US Fed’s Williams to Speak (1655)
  • US Fed’s Lockhart to Speak (1740)
  • New Zealand Dec. REINZ Housing Price Index (2030)
  • US Fed’s Bernanke to Speak (2100)


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