Vantage FX | Yen revesal gathers momentum, stocks lower| 9th January 2012

January 9, 2013

The Yen is making a bit of a comeback at the moment with a reversal in Dollar Yen, Euro Yen and Aussie yen even though yesterday Japanese Finance minister Aso was on the hustings talking up Japanese stimulus plans. The Euro also gave up some of its gains on weak German trade data and poor Eurozone unemployment numbers. In the US stocks are down also as we await the start of earnings season after the market closes this morning.

So it was a night of consolidation – but the question for traders is whether it was a night that the recent trends started to reverse?

That is a question that clearly should not be answered in aggregate but with reference to the particular markets and on that front the most likely candidate for a reversal is USDJPY and other associated Yen crosses.

From a behavioural standpoint the reversal in USDJPY and the Yen crosses in the past 24 hours is all the more stark given Japanese Finance Minister Aso’s comments in Asian trade yesterday that Japan is going to buy ESM bonds with its Reserves. This sparked a raft of Yen negative Euro positive commentary and initial price action in our time zone – of which I was skeptical given my technical view. When a trend is strong comments and data that supports it reinforces or is supposed to reinforce that trend. The reversal of the Yen and yen crosses yesterday signals the market most likely needs a consolidation to digest recent gains.

So yesterday afternoon I tweeted the then version of the above chart saying that “if USDJPY falls through 87.115 we had confirmation of a high and deeper retracement to 86.46 then 85.80” would be in the offing. This was an extension of my comment yesterday morning that we were only a day or so away from a signal for a turn in USDJPY.

The chart above gives me that signal – so for USDJPY I am expecting further weakness.

But I need to be clear on something here. Trading is a complex business where we trade multiple markets and some, like me, trade multiple time frames. So I can be long one time frame and short another time frame or system on the same market. Such is the case now in USDJPY. My long term trend following system has been long since the high 70’s in USDJPY as has my subjective system (As a tradestation trained person I am trying to learn the code to put this subjective system into MQL for MT4 at the moment) but my subjective system has now signalled a high in place and I am looking for a retracement to the levels stated above.

Looking at the data overnight the unemployment rate in Europe rose from 11.7% to 11.8% and the full 27 member Euro zone now has more than 26 million people on the dole queues. More than 2 million jobs were lost over the last year according to Eurostats. Adding to Euro gloom was German data that showed that exports in November fell 3.4% against an expected fall of 0.5% and from a rise of 0.2% last while imports fell 0.7% from an increase of 2.9% last and a rise of 0.4% expected. German factory orders also fell -1.8% versus a 1.4% fall which was expected.

But it wasn’t all bad news in Europe with the Eurozone Economic Sentiment Indicator rose to 87 from 85.7. Elsewhere Ireland issued €2.5 billion in debt last night. Sure it wasn’t an on market auction but rather a syndicated offer to banks but it is a positive step forward for the nation and its plans to regardless try to emerge from the bailout later this year.

Stocks

US markets are cautious ahead of the start of earnings season and Reuters reports that,

Profits in the fourth quarter are seen above the previous quarter’s lackluster results, but analysts’ current estimates are down sharply from where they were in October. Quarterly earnings are expected to grow by 2.7 percent, according to Thomson Reuters data.

So as I noted yesterday there is a chance for an upside surprise but the key for traders is that in the early part of earnings season stocks and other markets tend to be more volatile to each individual release before the trend emerges for the season. So watch Alco this morning and then the flow of releases over the next week – things should settle down after that.

We are watching revenues rather than profits to give an indication of the underlying momentum in the US economy.

So with 23 minutes to go before the close the S&P 500 is down 5 points or 0.33% to 1457, the Dow is down 0.42% at 13,327 and the Nasdaq is off 0.25% to 3,090.

In Europe the German DAX was off  0.47% no doubt aided by the data flow and concerns about the economy. In Paris the CAC was largely unchanged and the FTSE fell 0.17%. The periphery had a better night with both Spain and Italy seeing their bonds and stock markets rally. Milan was up 0.33% and Madrid rose 0.40%.

In Asia yesterday the reversal of the Yen hit the Nikkei and it was down another 0.86% which along with the previous nights sea of red set the tone for Asian equity trade. The Hang Seng fell 0.94%, the Kospi dropped 0.66% and the Straits Times fell 0.40%. In Australia the All Ords was down 0.54% and the Shanghai composite dropped 0.41%.

Global FX

Another night of broad US dollar strength mixed in with the stronger Yen as well. Euro has fallen 0.24% to sit at 1.3082 having made a high overnight of 1.3139. GBP is off 0.38% at 1.6053 but like the Euro well off its high of 1.6128 as well. The Aussie has traded 1.0467 to 1.0516 and sits largely unchanged at 1.0497 as I write. The yen as noted above has strengthened and has gained 0.68% against the USD and sits at the 87.15 level we identified above.

The ECB this week, 3.30 am Friday morning and then the BOJ on January 21st and 22nd are going to be big moments for FX markets so keep them in mind.

Looking at the 4 hour chart above of the Aussie dollar it is hard to know exactly what is driving it at the moment. Clearly there is support in the 1.0450/60 region and the remains a little thin above 1.05 and below 1.0530. Yesterday’s move to 1.0516 was reversed to a subsequent low for the day at 1.0467 before it bounced back above 1.05 again. While below 1.0530 AUDUSD is still a sell above 1.0510.

Data and thoughts about the impact on the ECB knocked the Euro’s rally overnight. On the 4 hour charts the failure below the 50% retracement of the recent sell off has pointed the outlook lower once again and a break of 1.3045 would signal a deeper retracement.

Commodities

Crude is unchanged at $93.18 bbl but it is starting to look like its rally from the mid $80’s is starting to run out of steam up here at the moment and we are watching this one for a short term trend reversal. Gold is up $14 oz or 0.85% to $1659 while Silver is up 1.06% to $30.35.

For my thoughts on gold please see my piece from yesterday – here

Data

In New Zealand we get Building permits this morning and in Australia we see HIA new home sales and then Retail sales for November. Tongiht GDP is out in the Eurozone and then we’ll be looking at German Industrial production. EIA Crude stocks will be out later in the night and given the technical outlook we’ll be watching these closely.

Catch me on Twitter @gregorymckenna or @FX_Global

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