FX - Yen Not Expected to Continue to Find Bids on Risk Liquidation

• USD Dollar consolidating latest gains; more strength expected
• European Central Bank still holding out from more active role in crisis
• US officials fail to come up with deal to reduce deficit
• Geopolitical risk creeps back into picture
• Yen still seen at risk as additional appreciation unwelcome
• Aussie and Sterling underperforming thus far

We head into the new week with the USD consolidating its latest gains and perhaps under some mild pressure that is still classified as corrective and nothing more than some short-term profit taking. Risks from here are for a fresh upside extension for the Greenback back towards and eventually through its key October highs against most major currencies. It seems as though the failure by US officials to reach a deal to reduce the massive US deficit is putting a bit of pressure on the buck early Monday, but the situation in the Eurozone is far graver at the moment and should continue to offset any US specific negative developments. Right now, the European Central Bank is holding out from a more active involvement in the EU debt crisis and it has become increasingly apparent that the EFSF will not be enough to get the job done. As such, the Euro and higher yielding currencies should remain exposed over the coming weeks withy risk liquidation themes still dominating headlines.

Geopolitical uncertainty is also factoring into price action on Monday, with things heating up in the Middle East over the weekend in Egypt, Syria and Yemen. While the Yen continues to benefit from the safe-haven flows, we do recommend proceeding with caution when buying the Yen, as in our opinion, we see this currency once again at risk for a major reversal on some official action to aggressively depreciate the local currency. The Yen trades just off record highs against the Buck and some other major currencies, and we simply do not feel that the Japanese government will tolerate additional appreciation in their currency that is brought on by external factors. The idea of having to absorb a good deal of the global risk liquidation flows should not sit well with locals and we continue to see the US Dollar as the primary beneficiary going forward, with the much bigger US economy in a better position to absorb the risk liquidation flows through the US Dollar.

Looking ahead, Eurozone current account, Canada wholesale sales, and US existing home sales are the key releases on the day. On the official circuit, Fed Lockhart is slated to speak later on. US equity futures are decently offered, and track lower by some 0.50%, while commodities are also tracking moderately lower. The Australian Dollar is the weakest currency thus far on the risk off trade, while Sterling is also under pressure on softer Rightmove house prices and a discouraging report from the BRC.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The latest break below 1.3480 should now open a fresh downside extension which ultimately exposes a retest of the key lows from October at 1.3145. Look for any rallies to be well capped below 1.3700, while ultimately, only back above 1.3870 would negate outlook. Once 1.3145 is taken out, it will negate the corrective October price action and should result in a more aggressive bout of selling into the 1.2000’s. We continue to project weakness over the coming weeks into the lower 1.2000’s as per the monthly chart.

USD/JPY:Although the market has come back under pressure following the recent surge to 79.55, we retain a constructive outlook with the price still holding above the daily Ichimoku cloud on a daily close basis. The bottom of the cloud currently comes in just under 77.00 and so long as the market continues to hold above the bottom of the cloud on a daily close basis, we recommend looking to be long this market in anticipation of a more significant bullish trend shift from record lows. A close back below 76.80 would however give reason for concern.

GBP/USD: The latest daily close below 1.5870 confirms our bearish outlook and should now open the door for a bearish resumption back towards the key October lows at 1.5270 over the coming days. Next key support comes in at 1.5630, while any intraday rallies are expected to be very well capped below 1.6000.

USD/CHF: The pair looks like it is in the process of carving a major base ahead of some significant upside over the coming weeks and months. The latest rally seems to be gaining momentum, and we anticipate that the market will soon clear the key October highs at 0.9315. Above 0.9315 should then accelerate gains and open the next major upside extension towards parity. Any setbacks from here should be very well supported above 0.8900.

--- Written by Joel Kruger, Technical Currency Strategist

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