Mid-Day Report: Dollar Downside Breakout, Hitting New Record Low against Yen

By: Emma Pinnock in Forex Consultant on Oct. 17, 2011

Dollar is sharply lower across the board as markets enter into US session on a couple of factors. Fed Tarullo’s call for resuming large scale purchase of mortgage-backed securities is certainly weighing on the greenback. In addition, German Chancellor Merkel insisted today that Germany and France have agreed over the main points on the plan to tackle the debt crisis. Pound received a strong boost from data showing that budget deficit shrank more than expected. Canadian dollar was boosted by stronger than expected consumer inflation data. Meanwhile, the Japanese yen, which finally breaks out of recent range against dollar, is boosted by news that Japan approved JPY 12.T extra budget for reconstruction and just maintained its verbal warning on strong yen.

Fed governor Tarullo, a voting member of FOMC, urged that the fed should “move back up toward the top of the list of options the large-scale purchases of additional mortgage-backed securities”. The came just after Boston Fed Rosengren’s comment that Fed should considering purchasing more securities, including mortgage-backed securities. St. Louis Fed Bullard also said that he would not rule out QE if there were further deterioration in the U.S. These comments triggered speculation that Fed is moving closer to QE3.

In discussion with lawmakers today, German Chancellor Merkel insisted that there is no difference between herself and French President Sarkozy over the best way to make use of the EFSF. Meanwhile, it’s reported that European governments may unless as much as EUR 9.4b to tackle the debt crisis as European leaders are facing increasing pressure from US and UK. Greece won a parliamentary vote on further austerity measures for securing the bailout fund. Two EU summit will be held the coming Sunday and Wednesday and markets will be expecting some concrete conclusion.

Sterling jumped earlier today as data showed public sector net borrowing dropped to GBP 11.4b in September while prior months’ data was revised down to GBP 10.9b. Canadian dollar jumped as CPI unexpectedly accelerated to 3.2% yoy in September while CPI core jumped to 2.2% yoy. German IFG business claimed dropped slightly less than expected to 106.4 in October.

Daily Pivots: (S1) 76.68; (P) 76.77; (R1) 76.89; More.

USD/JPY dropped sharply to as low as 75.80 so far today and the break of 75.94 confirmed that recent decline from 85.51 has resumed. Intraday bias is back on the downside, and current fall should target 61.8% projection of 80.23 to 75.94 from 77.48 at 74.82 first. On the upside, above 76.60 minor resistance is needed to signal bottoming. Otherwise, we’ll stay bearish even in case of strong recovery.

In the bigger picture, USD/JPY is still staying well inside the falling channel that started back in 2007 at 124.13. There is no indication of trend reversal yet even though medium term downside momentum is diminishing with bullish convergence condition in weekly MACD. Such down trend is still in favor to continue to 70 psychological level. In any case, break of 80.23 resistance is first needed to indicate completion of fall from 85.51. Secondly, break of 85.51 is needed to be the first signal of medium term reversal. Otherwise, we’ll stay cautiously bearish in the pair.

GMT Ccy Events Actual Consensus Previous Revised

0:30 AUD Import Price Index Q/Q Q3 0.00% 0.50% 0.80% 8:00 EUR German IFO – Expectations Oct 97 97 98 97.9 8:00 EUR German IFO – Business Climate Oct 106.4 106.3 107.5 107.4 8:00 EUR German IFO – Current Assessment Oct 116.7 116.5 117.9 8:30 GBP Public Sector Net Borrowing (GBP) Sep 11.4B 11.8B 13.2B 10.9B 11:00 CAD CPI M/M Sep 0.20% 0.10% 0.30% 11:00 CAD CPI Y/Y Sep 3.20% 3.00% 3.10% 11:00 CAD BoC CPI Core M/M Sep 0.50% 0.20% 0.40% 11:00 CAD BoC CPI Core Y/Y Sep 2.20% 1.90% 1.90%

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