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Japanese Yen Extends Gains as Japan’s ’Third Arrow’ Becomes Clearer

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ASIA/EUROPE FOREX NEWS WRAP

The Japanese Yen is once again the top performer, extending its gains from the end of last week after a slew of commentary over the weekend and at the start of trade on Monday from none other than Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda. Much has been made about the final leg of ‘Abenomics’ – the “third arrow” as the prime minister calls it – as it bears the promise of extensive tax reform.

On the news that the long-discussed sales tax hike favored by PM Abe could be put off, the Japanese Yen rallied and the Nikkei 225 fell hard, ending down 3.32% on the session. While it seems counterintuitive that risk markets sold off on news of lower taxes, it is clear that the signal is that loose fiscal policy will be the primary stimulus tool going forward.

Thus, with lower taxes likely to remain, consumers have more disposable income, and sales are likely to be higher than they would have otherwise, which should (as the BoJ is hoping) push up prices (inflation). Given how tepid the inflation picture is in Japan still, tightening of fiscal policy would certainly choke off any inflation, which would force the BoJ to act again, as I see it. So: no tax hike, Yen gains.

While the calendar is quiet today, the action picks up midweek with the FOMC Rate Decision. This coming week features nearly twice as many as events as last week; and there are three central bank meetings ahead of the July US labor market report on Friday. Volatility has been increasing and should remain elevated for the coming week.

Read more: Aussie, Euro, Sterling, and US Dollar Primed for Big Moves This Week

Taking a look at European credit, slight weakness in peripheral debt has held back the Euro to start the week. The Italian 2-year note yield has increased to 1.592% (+3.7-bps) while the Spanish 2-year note yield has increased to 1.868% (+0.5-bps). Likewise, the Italian 10-year note yield has increased to 4.422% (+2.6-bps) while the Spanish 10-year note yield has increased to 4.622% (+1.2-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:30 GMT

JPY: +0.52%

CHF: +0.15%

EUR: +0.11%

CAD: +0.09%

GBP: +0.04%

NZD: -0.09%

AUD: -0.14%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.12% (-0.59% prior 5-days)

ECONOMIC CALENDAR

Japanese_Yen_Extends_Gains_as_Japans_Third_Arrow_Becomes_Clearer_body_Picture_1.png, Japanese Yen Extends Gains as Japan's 'Third Arrow' Becomes Clearer

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.

TECHNICAL ANALYSIS – CHART OF THE DAY

Japanese_Yen_Extends_Gains_as_Japans_Third_Arrow_Becomes_Clearer_body_x0000_i1028.png, Japanese Yen Extends Gains as Japan's 'Third Arrow' Becomes Clearer

USDJPYThe USDJPY undercut trendline support off of the February 25 (Italian elections) and April 4 (BoJ announces massive easing program) lows, which is important considering their historical importance this year. Likewise, the uptrend off of the June 13 and July 11 lows cracked, and now a slight descending channel off of the July 8 and July 19 highs is guiding price action.

However, support may be found ahead of the central bank fireworks this week now that the USDJPY has traded into a conflux of significant levels. The 50% retracement of the June low to July high move comes in at ¥97.65; the 100% extension of the July 8 high to the July 11 low, extension to July 19 high move comes in at 97.57; and descending channel support with the parallels drawn to the July 11 and July 12 lows at 97.35/95.

If this price zone is to hold, then the daily RSI, just above 40, wouldn’t drop below said level on a daily close. For now, it is maintained, and with the Slow Stochastics (5,3,3) closing in on oversold levels, a bounce could be near before Wednesday.

— Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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EURUSD Weekly Technical Analysis: New Month, More Weakness

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What’s inside:

  • EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
  • Resistance in vicinity of 11825/80 likely to keep a lid on further strength
  • Targeting the low to mid-11600s with more selling

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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.

Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.

Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).

Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.

For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.

EURUSD: Daily

EURUSD Weekly Technical Analysis: New Month, More Weakness

—Written by Paul Robinson, Market Analyst

You can receive Paul’s analysis directly via email bysigning up here.

You can follow Paul on Twitter at@PaulRobinonFX.

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Euro Bias Mixed Heading into October, Q4’17

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Euro Bias Mixed Heading into October, Q4'17

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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British Pound Reversal Potential Persists Heading into New Quarter

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British Pound Reversal Potential Persists Heading into New Quarter

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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