Mid-Day Report: Yen Volatility to Remain in Focus after Markets Digest Mixed US Data

By: Milla Shaw in Forex Consultant on Aug. 27, 2010

Markets are overwhelmed by the sharp reversal in Japanese yen today and it remains the main theme in early US session. USD/JPY dropped from intraday high of 85.89 and reaches as low as 84.54 so far, a 135 pts swing after BoJ emergency announcement. Mixed data from provides little inspiration to markets and selling in yen crosses somewhat stabilizes a bit. Though, development in risk sentiments in US session would probably trigger another round of yen crosses in general.

US personal spending rose more than expected by 0.4% in July but income lagged behind by rising 0.2% only. PCE core was steady at 1.5% yoy while headline PCE climbed slightly to 1.5%. Canada current account deficit widened to CAD -11b in Q2. IPPI and RMPI rose 0.1% mom and 1.8% yoy respectively in July. Eurozone confidence indicators generally showed improvements in August. New Zealand reported first trade deficit in 7 months at NZD -186m in July. Business confidence dropped tumbled to 16.4 in August.

After an emergency meeting, BoJ announced additional easing measures to boost Japan’s economic recovery, introducing a 6-month term in the fixed-rate funds-supplying operation against pooled collateral and substantially increased the amount of funds to be provided through the operation. BOJ will provide of 10 trillion yen of loans for 6 months, in addition to the 20 trillion yen for 3 months announced in March. The program, together with the uncollateralized overnight call rate which has stayed at 0.1%, is expected to encourage a decline in market interest rates and further enhance easy monetary conditions. This is the first unconventional measures that the BOJ adopted in 5 months. More in BOJ Pledged 10 Trillion Yen For 6 Months To Stimulate Recovery.

British Chamber of Commerce said that BoE “cannot ignore the risk that inflationary expectations may worsen”, but “threats of a setback to growth remain more serious.” Hence, the organization urged BoE to keep rates unchanged at 0.5% level until second quarter of next year. The group also forecast growth to average around 2% in the next five years, lower than the 3% average in the 15 years through 2007. Growth forecast for 2010 and 2011 were raised to 1.7% and 2.2% respectively.

SNB Vice Chairman Thomas Jordan said that the bank is following the situation of franc strength “very closely”. Jordan said that bank doesn’t have an “exchange rate target” but insisted that steep changes in exchange rate have “big impact” on economy an prices. Though, Jordan also described current monetary policy situation as “extremely complex” as there is small risk of “return of deflation scenario” while inflation could exceed 2% long term target if “we don’t correct our expansive monetary policy”.

Looking at the dollar index again, consolidations from 83.56 is still in progress and more sideway trading could be seen. But downside is expected to be contained by 81.92 support and bring another rise. Sustained trading above 83.45 will confirm that correction from 88.70 has completed at 80.08 and will target 61.8% retracement at 85.40 at least. However, break of 81.92 will dampen this bullish view and turn focus back to 80.08 low instead.

Daily Pivots: (S1) 84.50; (P) 84.97; (R1) 85.68; More.

As noted before, a temporary top is in place at 85.89 and intraday bias in USD/JPY remains neutral for the moment. On the upside, above 85.89 will bring another rise. However, since price actions from 83.61 should be conoslidative. Hence, even in case of another rise, upside is expected to be limited well below 88.25 support turned resistance and bring another fall. On the downside, below 84.27 minor support will flip intraday bias back to the downside. Further break of 83.61 will confirm down trend resumption and target 80 psychological level next.

In the bigger picture, whole down trend from 2007 high of 124.13 is still in progress and there is no sign of reversal yet. Such down trend could still extend further towards 79.75 (1995 low). Though, we’ll be cautiously looking for some sign of loss of momentum in case of further decline. On the upside, however, note that break of 94.97 resistance is needed to be the first sign of medium term reversal. Otherwise, outlook will remain bearish.

GMT Ccy Events Actual Consensus Previous Revised

22:45 NZD Trade Balance (NZD) Jul -186M -40M 276M 214M 03:00 NZD NBNZ Business Confidence Aug 16.4 — 27.9 09:00 EUR Eurozone Economic Confidence Aug 101.8 101.6 101.3 101.1 09:00 EUR Eurozone Consumer Confidence Aug -11 -12 -12 09:00 EUR Eurozone Industrial Confidence Aug -4 -4 -4 09:00 EUR Eurozone Services Confidence Aug 7 7 6 12:30 CAD Current Account (CAD) Q2 -11.0B -10.2B -7.8B 12:30 CAD Industrial Product Price M/M Jul 0.10% 0.40% -0.90% 12:30 CAD Raw Materials Price Index M/M Jul 1.80% 0.20% -0.30% 12:30 USD Personal Income Jul 0.20% 0.30% 0.00% 12:30 USD Personal Spending Jul 0.40% 0.30% 0.00% 12:30 USD PCE Core M/M Jul 0.10% 0.10% 0.00% 12:30 USD PCE Core Y/Y Jul 1.40% 1.40% 1.40% 12:30 USD PCE Deflator Y/Y Jul 1.50% 1.40% 1.40%

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