Forex: Japanese Yen Rebound Ensues - Rally Over?

ASIA/EUROPE FOREX NEWS WRAP

The rally seen across the globe in high beta currencies and risk-correlated assets has taken a breather the past several days, as investors have shifted to neutral following the US fiscal cliff resolution. Although the S&P 500 is sitting near its highest closing levels since December 2007, significant questions remain over the state of the US budget, the debt ceiling about to be hit in February, and whether or not the Federal Reserve is planning an exit from the bond market at the start of next year. But the story this week is not about the US economy and her creditworthiness; instead, our focus is on the Japanese Yen.

The Japanese Yen has been a significant underperformer the past few months, losing some -1100-pips to the US Dollar following Shinzo Abe’s ascent to the Japanese premiership. But over the past two days, the USDJPY has had its worst performance since mid-November. Mainly, this is due to speculation that the Bank of Japan would fail to meet heightened expectations for a significantly dovish monetary policy; the view has developed that the incoming policies as a result of the upcoming January 22 policy meeting have been priced in.

Be that as it may, the Japanese Yen is simply a very oversold currency. In fact, according to the CTFC’s COT report, net non-commercial futures positioning is at its shortest level since July 2007; the short trade is very crowded. A look at the weekly chart shows that the USDJPY hasn’t posted a negative period since the first week of November. In fact, last week’s RSI was above 80 – the last time that happened was in December 2005, which produced a pullback of >500-pips. Accordingly: seeing the Japanese Yen bottom (xxxJPY pairs top) after the BoJ would not be surprising; the conditions are ripe for a significant turn around.

Taking a look at European credit, slight strength in peripheral bonds has helped the Euro retain yesterday’s gains. The Italian 2-year note yield has decreased to 1.686% (-3.0-bps) while the Spanish 2-year note yield has decreased to 2.343% (-1.6-bps). Similarly, the Italian 10-year note yield has decreased to 4.287% (-5.0-bps) while the Spanish 10-year note yield has decreased to 5.044% (-2.7-bps); lower yields imply lower higher.

RELATIVE PERFORMANCE (versus USD): 11:20 GMT

JPY: +0.38%

CAD: +0.05%

EUR: 0.00%

AUD:-0.03%

CHF:-0.05%

NZD:-0.11%

GBP:-0.19%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.04% (+0.35% past 5-days)

ECONOMIC CALENDAR

Forex_Japanese_Yen_Rebound_Ensues_Rally_Over_technical_analysis_body_x0000_i1031.png, Forex: Japanese Yen Rebound Ensues -  Rally Over?

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

TECHNICAL ANALYSIS OUTLOOK

Forex_Japanese_Yen_Rebound_Ensues_Rally_Over_technical_analysis_body_EURUSD.png, Forex: Japanese Yen Rebound Ensues -  Rally Over?

EURUSD: Yesterday I said: “the bearish RSI divergence seen on the daily chart (as well as the 4H) is now resolved; if anything, bullish RSI divergence is forming. With price act the descending TL off of the September and October highs, the pair is at a critical juncture.” Indeed, this juncture produced a rally, though further upside is in question ahead of the ECB on Thursday. Support comes in 1.3025/30 (50-EMA), 1.3000 (weekly low), 1.2950/65 (ascending TL off of July and November lows) and 1.2875/95. Resistance is 1.3050/60, 1.3170, 1.3280/85, and 1.3380/85 (mid-March swing high).

Forex_Japanese_Yen_Rebound_Ensues_Rally_Over_technical_analysis_body_USDJPY.png, Forex: Japanese Yen Rebound Ensues -  Rally Over?

USDJPY: No change: “The pair has exploded to its highest level since July 2010, leaving the December 2008/January 2009 lows in focus at 87.00/20. Given BoJ policy, any dips seen in the USDJPY are viewed as constructive for further bullish price action (the market remains very net-short the JPY, however). With 87.00/20 easily broken, the pair is now in a zone that proved to be strong support throughout 2009 and 2010, at 88.15/95. Support comes in at 87.00/20 and 86.20/40.”

Forex_Japanese_Yen_Rebound_Ensues_Rally_Over_technical_analysis_body_GBPUSD.png, Forex: Japanese Yen Rebound Ensues -  Rally Over?

GBPUSD: No change: “The pair has fallen back from 1.6300, again, though with no follow through yet, my levels remain the same (they haven’t changed since early-December). However, the pair is now coming into ascending TL support off of the July and November lows at 1.5985. Support is there and 1.5895 (200-DMA). Resistance comes in at 1.6085/90 (50-EMA), 1.6180, and 1.6300/10 (post-QE3 announcement high in mid-September).”

Forex_Japanese_Yen_Rebound_Ensues_Rally_Over_technical_analysis_body_AUDUSD.png, Forex: Japanese Yen Rebound Ensues -  Rally Over?

AUDUSD:No change: “The AUDUSD still can’t break the descending trendline resistance off of the July 2011 and February 2012 highs, which come in at 1.0530/50 today, but that doesn’t mean the uptrend is over just yet. However, as noted the past several weeks, the “consolidation…the next few sessions” may be ending. Given the Fed Minutes, any risk-off move could see a drop as low as 1.0145/65. Support is at 1.0340/50, 1.0280/95 (November swing low, 200-DMA), and 1.0145/65. Resistance is 1.0530/85 and 1.0605/25 (August and September highs).”

Forex_Japanese_Yen_Rebound_Ensues_Rally_Over_technical_analysis_body_SPX500.png, Forex: Japanese Yen Rebound Ensues -  Rally Over?

S&P 500: No change: “The S&P 500is back above a very significant zone of 1445/50 (descending trendline off of September and October highs, 100% Fibonacci extension off of the November 16 low, the November 23 high, and the November 28 low extension), and a move higher necessarily points to 1470/75. Support comes in at 1425, 1400, 1390 (200-DMA) and 1345/50 (November low).”

Forex_Japanese_Yen_Rebound_Ensues_Rally_Over_technical_analysis_body_GOLD.png, Forex: Japanese Yen Rebound Ensues -  Rally Over?

GOLD: No change: “Gold is at a make or break level right now, former Symmetrical Triangle support at 1630/40, and its lowest level since August, before the ECB and the Fed’s QE intervention hopes took hold. Additionally, when considering the move off of the September highs, a measured A-B=C-D (as expressed on the Daily) suggests that a bottom could be in place at these levels as well. Support is there at 1580. Resistance is 1690/95, 1735, 1755, and 1785/1805.”

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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