News From Japan Unnerves FX Markets

April 13 2011 by Spencer McKay in Forex Release |No Comments

FX markets pulled back risk appetite in Asian sessions in the wake of an another earthquake and amid rumors that Japanese authorities would imminently upgrade the nuclear disaster to the same level as Chernobyl. We don’t really see much of the USD buying as a relief rally, due to the US governments budget approval, as this would be a heck of a delay in response to an event that was highly coordinated for the public consumption. While an upgrade of this nature should have an economic impact, it most definitely will have an immediate psychological impact, which has already been seen in stock prices today. Asia regional indices were expectedly lower with Nikkei down -1.69 and Europe opening lower across the board. Safe-haven trades in USD, JPY and CHF were gainers, while the AUDJPY, our risk barometer, dropped sharply to 86.87 from 89.10. Commodities also retracted from its seemingly unassailable bullish trend, as risk sentiment faded and hopes of a cease fire in Libya, with oil wti falling below the $110.0bll to $107.87bll (although we suspect it will be short lived).

While the news from Japan is obviously disturbing, we don’t see any lasting structural shift and suspect risk appetite will slowly reemerge as economic data comes back into focus. Today’s UK CPI and ZEW releases in European trading should do the trick. Perhaps the most interesting will be the UK CPI, where many are positioned for a weaker figure. This would be the first fall in seven months and will seriously weigh on tightening advocates argument. A print below consensus 4.4% will puts pressure on the sterling. Watch out for spill over into EUR from EURGBP buying.

The in the last 24hrs, the vast majority of Fed comments were decidedly dovish, eroding expectations that some members are poised to shift from their ultra dovish views. We had suspected that the Fed will remain conveniently blind to rising inflation expectations in order to rationalize the completion of QE and further artificially stimulate the US economy. Vice Chair Yellen stated that increasing commodity prices did not necessarily command a shift in monetary policy. Although she did respond with the fashionable corporate line that the Fed would not sit idlely by as inflation expectations increased and stood ready to act. Given the general blind eye to US inflation, while the rest of the world’s central banks actively defend their economies, we expect an increase of focus on next week’s US CPI read. That said, we don’t expect much from todays BoC rate announcement and we are in line with the consensus that the bank will hold rates at 1.00%. With CPI reading of recent coming in benign and risks to the global recovery increasing, officials are unlikely to tighten, risking widening interest rate differentials and triggering further inflows.

07:30 SEK CPI – Headline Rate (Mar) y-o-y
08:30 GBP CPI (Mar) y-o-y
09:00 EUR German ZEW Survey (Current Situation) (Apr) index
09:00 EUR ZEW Survey (Econ. Sentiment) (Apr) index
09:00 EUR ZEW Survey (Econ. Sentiment) (Apr) index
10:15 EUR Fed’s Dudley Speaks
10:40 EUR ECB’s Stark Speaks
13:00 CAD Bank of Canada Rate % 1.00%
13:15 USD Fed’s Hoenig Speaks
18:45 USD Fed’s Tarullo Testifies
18:50 USD Fed’s Fisher Speaks

The Risk Today: EurUsd Since hitting a new peak of 1.4489 on Friday EURUSD has been in a steady drift lower, and has now dipped below the 1.4400 level. Nevertheless, the events of Friday have allowed us to adjust our 2-week uptrend channel slightly steeper than it was originally drawn, so we now expect uptrend support to come into play a little earlier at 1.4330-35 levels. Our bullish bias remains firmly in place, so we expect decent buying interest ahead of that uptrend support to send us back towards the 1.4489 peak, and above there we’d be looking at challenging the 2010 high of 1.4580 (13 Jan 2010 high). If however we are wrong and the bearish drift manages to negate the current uptrend channel, then next supports below are eyed at 1.4243 (7 Apr low), 1.4152 (5 Apr low), 1.4062 (1 Apr low), 1.4023 (28 Mar low), and 1.4000 psychological support.

GbpUsd After reaching 1.6428 highs twice (once either side of the weekend), GBPUSD has failed to gather further upside momentum which has led to a rather rapid decline lower. More bearish still is that the 2-week uptrend channel we had in place has now been broken around 1.6315, and we may be seeing the start of a potential head & shoulders pattern on the hourly chart. As things stand, there is only a first shoulder and head in place, so we still require another shoulder to form before we can genuinely call this pattern valid. The neckline of the pattern stands at roughly 1.6255-60, so the target would be somewhere in the region of 1.6090. This level coincides with the 1.6092 low seen on 5 Apr, and below there we eye further support at 1.5973 (1 Apr low), and 1.5937 (28 Mar low). Should 1.6255-60 support continue to hold the pair up, then look for pockets of supply towards the back of the former uptrend channel (currently 1.6330), then 1.6428 (8 & 11 Apr highs), 1.6458 (19 Jan 2010 high), 1.6516 (7 Dec 2009 high) and 1.6746 (25 Nov 2009 high).

UsdJpy Since the break of the 2-week uptrend channel at the end of last week, USDJPY has been in almost constant decline – just this morning plumbing to new lows of 83.46 We have now managed to draw a new downtrend channel on the past week’s price action, and feel that from here, the pair will continue to struggle against selling pressure on any rallies back up towards 84.60 (the upper edge of the trend channel) and 84.79 (the overnight high). Next layer of support noted on the downside is this morning’s low 83.46, then the lower edge of the downtrend channel (83.35-40), 82.56 (31 Mar low), 81.55 (29 Mar low), and 80.51 (18 Mar low).

UsdChf USDCHF has tumbled to 0.9020 lows this morning, as a 1-week downtrend channel continues to dominate. As regular readers have heard before, our bias in a downtrend is to be sellers on rallies, and today we feel that any squeezes back up towards 0.9100 levels would be rich levels to sell into – however we may not get such a move considering the bearish momentum prevailing at the moment. Remaining supports on the horizon are 0.8964 (17 Mar low) and the all-time low 0.8896; should we break lower then there will be very little standing in the way of a move to 0.8500 levels. In the meantime, resistance levels now stand at 0.9105 (this week’s high), 0.9202 (last Thursday’s high), 0.9255, 0.9296 (6-7 Apr high), 0.9340 (1 Apr high), 0.9369 (9 Mar high) and 0.9392 (23 Feb high).

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