The most significant price action overnight was in the Yen with the single currency getting hit hard on an escalation of geopolitical tensions with North Korea in light of the ongoing concerns over the nuclear testing. This catapulted Usd/Jpy back above 97.00 with the pair trading some 1.70% higher on the day.
Fundys – The most significant price action overnight was in the Yen with the single currency getting hit hard on an escalation of geopolitical tensions with North Korea in light of the ongoing concerns over the nuclear testing. This catapulted Usd/Jpy back above 97.00 with the pair trading some 1.70% higher on the day. In other price action, currencies continue to be very well supported with any dips used as opportunities to build on existing long positions. The commodity bloc currencies have been the outperforming currencies on the day with the higher yielding Kiwi benefiting the most. Yesterday’s heavy selling in the US equity market along with a reaffirmation by Moody’s of the US Aaa credit rating, had weighed on currencies into the afternoon, but with equity futures now tracking higher on the day, carry traders have been quite comfortable building on their positions. As a result of the mentioned Yen weakness and recovered risk appetite, the yen crosses have also been surging with many short-term specs getting stopped after playing the short side overnight. On the whole, the slew of Eurozone data was mixed with consumer confidence, business climate and industrial confidence coming in weaker, while economic confidence and [B]German unemployment[/B]were better than forecast. Meanwhile Eurozone services confidence was as expected. ECB Constancio was also on the wires echoing recent Bini-Smaghi remarks that the central bank has not decided on a floor for rates. After shining in previous sessions, the Pound has been showing relative weakness today, following Blanchflower warnings on the economy and a weaker CBI Index. Oil has been trading flat on the day despite higher equity futures and a weaker USD, after OPEC decided to leave quotas unchanged. There had been speculation earlier in the week of potential production cuts. Looking ahead, US durable goods (0.5% expected), initial jobless claims (628k expected) and continuing claims (6745k expected) are due at 12:30GMT. New home sales (360k) follow shortly after at 14:00GMT).
Techs - EUR/USD showing very little follow through thus far after finally taking out key support by 1.3860 on Wednesday. However the break is still significant in the short-term picture, and a top looks to be in place by 1.4050 for now. We do not rule out the potential for additional rallies intraday, but see any upside well capped ahead of 1.4000 with an ideal lower top by 1.4050-60. USD/JPY (See below). GBP/USD dips overnight were well supported by 1.5850 with the market rallying back towards 1.6000 into the US session. Wednesday’s shooting star top-like formation is however bearish and suggest that 1.4085 could cap gains for a while. Look for a break back below 1.5850 to accelerate declines and confirm bearish reversal, while sustained rallies back above 1.6000 are concerning. USD/CHF very well offered after finally taking out key topside resistance by 1.0930 on Wednesday. Key levels to watch over the coming session come in by 1.0955 and 1.0810 with a break above or below now required for clearer directional bias.
Flows – Asian central bank, Eastern European sovereign and model fund demand for Eur/Usd; Russian specs on the offer. Asian offers in Usd/Cad. CTA and US custodial demand for Usd/Jpy and Yen crosses. Sovereign fund on the offer in Cable.
Trade of the Day – Usd/Jpy: The daily structure is still quite bearish and a fresh lower top is now sought out below 99.75 ahead of the next drop back below 93.85. Intraday studies are now showing highly overbought and we see the risks from here for a more significant pullback into the US session. The market has also now retraced the 50% fib retrace off of the 99.75-93.85 move along with the 38.2% fib retrace off of the more significant 101.45-93.85 move making current levels attractive entry to build on short trades. Strategy: SELL @96.70 FOR A 95.55 OBJECTIVE, STOP @97.30.
Fundamental Catalyst – The moves overnight have been driven by the escalation in geopolitical tensions with North Korea. However, we feel the reaction is somewhat overdone at current levels and would not anticipate anything more substantial to come out of this other than cross border political banter. Additionally, while the correlation in the Yen has broken off somewhat with risk aversion, we would not yet abandon the relationship completely, with equities starting to show signs of rolling over.
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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