Yen and sterling in focus in a key week for both
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
We could well see a quiet start to this week given that the US have Martin Luther King day today, with market attention likely to be focussed on Japan and the UK this week, given the sharp falls seen in both currencies in the last week or so ahead of some key economic events this week. European markets look set to start the week on the front foot after Friday?s strong US finish, shrugging off a defeat for Angela Merkel in state elections at the weekend.
The recent sharp fall in the yen has helped alleviate some of the recent pressure on Japanese exporters who have struggled to remain competitive in the wake of a significant rise in the currency against the US dollar in the last 6 years.
In 2007 the US dollar was trading at around 120.00 against the yen, and in that time a combination of interest rate cuts and massive QE from the Fed sent the yen at one stage to new all-time highs of 75.30, a rise of over 35%.
Since the election of the new Japanese PM Shinzo Abe, who pledged to be much more interventionist in trying to drag the Japanese economy out of its deflationary funk by pushing the Bank of Japan to be more aggressive, the yen has dropped sharply, in anticipation of a significant change in tack at this week?s Bank of Japan monthly meeting.
This has caused some squealing and hand wringing amongst some US carmakers who claim that the Japanese are manipulating their currency in order to regain some of their lost competitiveness, which seems a bit rich given that the Federal Reserve has been doing exactly that for the last few years. It really can?t be any surprise if other countries eventually follow suit.
Expectations are for another boost to the BOJ?s asset buying program, by about 10 trillion yen, as well as a possible undertaking between the bank and the government to look at an inflation target for monetary policy. Anything less could well see the recent yen weakness come to a shuddering halt.
It is also a big week for the pound after last week?s sharp declines as investors start to rotate capital out of the relative haven that has been the UK, and back into Europe. Concerns about the future of the UK?s role in Europe alongside some pretty ropey economic data last week has seen the pound drop below its long term 200 day MA against the US dollar.
With public finances and Q4 GDP data out later this week expected to point to continued stagnation at best there is a building expectation that the Bank of England may well feel compelled to step on the gas with more QE. While this seems unlikely given the recent inflation numbers, this week?s MPC minutes could be somewhat more dovish in light of recent data weakness.
We also have a two day Eurogroup finance ministers meeting starting today, where discussions are likely to continue with respect to the Cyprus bailout, which is proving a lot trickier to agree than expected.
The subject of bank recapitalisations is also likely to come up, particularly from a legacy point of view, with countries like Spain and Ireland arguing that the cost of them not be added to state debt, something that Germany and Finland are opposed to until a fully-fledged Europe wide banking regulator is in place.
Ministers are also likely to discuss the likely successor to Jean Claude Juncker, with the early favourite the new Dutch Finance Minister.
EURUSD ? the single currency appears to be forming a potential double top formation at the 1.3400 level. Only a move towards the 1.3500 level negates this scenario, a break of which targets 1.3835, the 61.8% retracement of the 1.4940/1.2045 down move. A break below 1.3250 where we have the base suggests a test towards the long term support line from the 1.2045 lows now at 1.3035 which remains the key level on the downside.
GBPUSD ? last week?s break below the 200 day MA at 1.5910 could well see further losses start to unwind if we break below the November lows at 1.5825. This area is also a 50% retracement of the 1.5270/1.6380 up move. A break here targets 1.5680.
The pound needs to push back through 1.6050 to retarget 1.6130.
EURGBP ? the 0.8420 level remains a key resistance given that it is 50% retracement of the down move from 0.9085 to the lows at 0.7755. The 0.8325 level should now act as support on any pullbacks. Long term trend line support at 0.8100 comes in from the 0.7755 lows.
USDJPY ? another new high, this time at 90.25 saw the yen push back from 90.35, 76.4% of 95.00/75.30 move. Key support now lies at Thursday?s low at 87.80, with a break below 87.50 targeting 85.00.
The long term target stays at the 94.00 level, ahead of tomorrow?s BoJ meeting. With momentum continuing to look stretched be prepared for a sell the fact response to any decision tomorrow.
Equity market calls
FTSE100 is expected to open 29 points higher at 6,183
DAX is expected to open 20 points higher at 7,722
CAC40 is expected to open 9 points higher at 3,751