By Christopher Vecchio
Published: September 19, 2012
The Bank of Japan announced a ¥10 trillion ($126 billion) bond-buying program earlier today, upping its total fund capacity to ¥55 trillion ($695 billion). Although the Japanese Yen has weakened, the extra liquidity has done little to spur desire for high beta and risk-correlated currencies like the Aussie or the Euro.
First the European Central Bank, then the Federal Reserve, and now the Bank of Japan: all are implementing massive easing policies to try and help their respective economic jurisdictions recover. But there’s one main difference: the ECB’s and the Fed’s plans are unlimited in nature (with the Fed’s likely to be more effective at depreciating the US Dollar given the unsterilized nature of the program), while the BoJ’s is capped at a paltry ¥10 trillion ($126 billion).
The new liquidity injection spurred demand for high beta currencies and risk-correlated assets initially, with the Australian and New Zealand Dollars, as well as the Euro, gaining against the Japanese Yen and the US Dollar in the wake of the release. However, by pre-US trading hours, any enthusiasm spurred by the BoJ’s move had faded, and risk-aversion – a move back into the Japanese Yen and the US Dollar, as well as out of equities and into safe government bonds (US Treasuries, German bonds) – is starting to brew.
In Europe, rumors are starting to emerge that Spain will request a sovereign bailout sometime in early-October ahead of the European Stability Mechanism (ESM) coming online on October 8, and bond markets are reacting as expected – traders are bidding up short-term Spanish bonds (yields down) to front run the ECB. Nevertheless, the Euro is leading to the downside today: it is possible that as the reality of the ECB swapping out high-rated credit (German) for low-rated credit (Spanish) on its balance sheet could be hurting the single currency’s prospects. We’ll explore this theme in more detail over the coming days.
Taking a look at credit, peripheral European bond yields are slightly lower despite the Euro’s weakness. The Italian 2-year note yield has decreased to 2.158% (-5.8-bps) while the Spanish 2-year note yield has decreased to 2.939% (-24.9-bps). Likewise, the Italian 10-year note yield has decreased to 4.995% (-3.4-bps) while the Spanish 10-year note yield has decreased to 5.730% (-11.3-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:58 GMT
NZD: -0.02%
CAD: -0.05%
CHF: -0.08%
JPY: -0.13%
AUD: -0.18%
GBP: -0.20%
EUR: -0.32%
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.23% (+0.12% past 5-days)
ECONOMIC CALENDAR
The docket is fairly light today but our attention is drawn to three data pieces due out around the US cash equity open. At 08:30 EDT / 12:30 GMT, the USD Housing Starts (AUG) report is due, and a slight uptick is forecasted. Also released at that time is the USD Building Permits (AUG) report, which is forecasted to show a small decline. Housing Starts are the more important release of the two, but it should be noted that Building Permits can serve as a leading indicator for the health of the housing sector. Later, at 10:00 EDT / 14:00 GMT, the USD Existing Home Sales (AUG) report will be released, and a slight gain is due there as well. Overall, if the actual meet the expectations, the data should do little to inspire confidence that the housing sector has bottomed in the US.
TECHNICAL OUTLOOK
EURUSD: Little has changed over the past 24-hours, though the pair has traded into a region of soft support as the daily RSI comes out of overbought territory: The EURUSD continues to pullback from its 76.4% Fibonacci retracement on the February 2012 high to the July 2012 low at 1.3145, closing below the key ratio for the second consecutive day on Monday. Near-term resistance lies at 1.3145, 1.3165/70, 1.3240, 1.3265/85, and 1.3360. It is possible that a long-term bottom is now in at the 1.2040/45 low set in late-July. Interim support comes in at 1.3015/20 (5-EMA), 1.2930/35, and 1.2820/30 (200-DMA, late-April swing high).
BB represents Bollinger Bands ®
USDJPY: The USDJPY has rallied further today after the BoJ’s newest stimulus measures. A close above 78.60 leaves open the possibility for 79.10/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs) – the pair has already rallied into and failed at these levels today. A close below 78.60 has interim support at 78.10/20, 77.90, 77.65/70 (June 1 low), 77.45/50, and 77.10/15 (September low).
GBPUSD: The Inside Day noted yesterday has yielded to a pullback, though the 5-EMA (1.6195/1.6200) remains unscathed thus far – the sharp uptrend is very much still in play. Beyond this, little has changed over the past several days: “The key 1.6120/40 level cracked with ease on Friday and our bias looks longer for the foreseeable future. The weekly close above said level opens the door for a move towards 1.6400 in the coming days. The former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus, now that the descending trendline off of the April 2011 and August 2011 highs broke last week. Below 1.5930/40, near-term support comes in at 1.5860/75 (ascending trendline off of August 2 and August 31 lows), 1.5770/85 (late-August swing lows), and 1.5700.”
AUDUSD: The muddle lower continues, although the pair is finding support in a classic manner – at former resistance. The descending trendline off of the August 9 and August 23 highs has kept the pair supported the past two-days, and with the 20-DMA overlapping at 1.0415/20, a base could be building for the next move higher. Near-term resistance comes in at 1.0480/85, 1.0550/60, 1.0600/15 (August high) and 1.0630. Should we see a rally up towards 1.0600 again, another failure would mark a Double Top (or Triple Top, if being liberal with the definition) and signal a push for a test of 1.0250/70 (ascending trendline off of the June 1 and September 6 lows) then 1.0200/05 (100-DMA). Support comes in at 1.0425/45 (swing zone on 4-hour chart back to July 19), 1.0410/20 (descending trendline off of the August 9 and August 23 highs, 20-DMA, mid-August swing lows), 1.0325 (200-DMA), and 1.0250/70.
— Written by Christopher Vecchio, Currency Analyst
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