The big mover in FX markets today has been the yen. It has dropped sharply across the board after the Japanese trade minister said that USDJPY at 100 was no big deal, it only threatened the economy when it rose to 110 or 120. This suggests that the government may target a move back to 100 in USDJPY in the medium-term. The market doesn’t seem to be questioning how the government will get the yen down to this level versus the dollar, especially after the underwhelming action from the BOJ earlier this week. However, Japanese Prime Minister Abe waded back into the debate last night and said he wants to reach the 2% inflation target as soon as possible. One way this could happen would be if the law changed to allow the BOJ to buy more government debt. Watch this space…
A temporary bottom in USDJPY
These comments caused a ferocious move in USDJPY; it is currently 120 pips higher on the day, highlighting how volatile this cross is especially since it is basically controlled by two central banks. Next week the Fed takes the baton from the BOJ when it holds its first meeting of the year. It is currently running into resistance at 89.60, above here the next key resistance level is 90.30 – the intra-day highs from earlier this week. There are some bullish technical signals that suggest we could get over the 90.00 hurdle in the coming days. This cross is not yet looking overbought according to momentum indicators, also yesterday’s daily candlestick was a hammer pattern – a small upper body with a long lower shadow. This suggests the market was attempting to form a bottom, and 88.00 could be the low for now.
France starting to look like a peripheral economy
Elsewhere, Eurozone PMI data for January was the key data release this morning. It surprised to the upside, with the composite reading come in at 48.2, more than the 47.5 expected for the first month of the year. This is the strongest reading since April 2012, and although it remains in contraction territory it suggests the Eurozone economy could be making a bottom and things could get better from here. The regional variations remain quite stark, and what is most surprising is that France is starting to resemble a peripheral economy. Its service sector PMI plunged to 43.6 in Jan, while the manufacturing sector tumbled to 42.9 from 44.6 in Dec. This is deep in recession territory and suggests that France’s path back to growth could be littered with hurdles in 2013. In contrast Germany’s service sector PMI rose to a stunning 55.3, the highest level since mid-2011. Germany seems to be following the US and China to a new growth paradigm, while France and other peripheral economies remain in the shadows. This was reinforced by Spain’s unemployment data for Q4, which rose to a fresh high of 26.2%, up from 25.02% in Q3. Unemployment is a lagging indicator and we will need to see if the stabilisation in growth in the currency bloc can help the people of Spain (especially the young) get jobs in the coming months.
The mixture of a surging dollar and mixed news on the economic front for Europe capped EURUSD gains at 1.3350. This cross is still in a range between 1.3250 and 1.34. Next week’s FOMC meeting could provide FX traders with more direction on the prospect of a stronger dollar in the medium-term, we don’t see EURUSD moving out of this range before then.
What is up with the Aussie?
Elsewhere, the Aussie has moved with the yen the last couple of days and is lower today after shrugging off stronger China data. I need to think about this as it could say something fundamental about the Aussie; I’m just not sure what that is yet. Support lies at 1.0475 in AUDUSD, and after today’s sharp sell off this level could attract some buying interest as it is starting to look very oversold.
Look out for US initial jobless claims today and Japan CPI overnight for some fundamental-fuelled volatility later on.
One to Watch: USDJPY – temporary bottom at 88.00 after yesterday’s daily hammer candlestick, as you can see below.