Mid-Day Report: Yen Weakens as Sentiments Improved, BoJ Awaited

Yen weakens broadly today as market sentiments improved. Major European indices are generally higher following rally in Asian equities. US futures also point to higher opening. BoJ policy decision will be a main focus in the coming Asian session. The central bank is expected to keep policies unchanged, keeping rates near zero and the announce pace of monetary expansion at JPY 60-70T.A focus will be on whether BoJ would revise the economic projections after seeing the impact of the April tax hike. Another event to watch will be RBA minutes. RBA reiterated its neutral stance during June meeting and expected itself to keep rates unchanged for a period of time.

While AUD/JPY dipped considerably last week there is no clear sign of near term reversal yet. The cross is in medium term consolidation pattern from 86.4. While further rise cannot be ruled out, we’d expect strong resistance from 61.8% retracement of 105.42 to 86.40 at 98.15. Meanwhile, a break of 93.03 support will indicate that such consolidation pattern is finished and will turn near term outlook bearish for a test on key support level at 86.40.

Sterling is so far the strongest European currencies this month. According to a Bloomberg survey, 34% of economists expected BoE to hike interest rates from the current record low of 0.50% by December. That’s a notable rise from 12% back in early June. Nonetheless, half the 50 economists surveyed predicted the first hike in Q1 of 2014.

Over the weekend, Bundesbank Chief Weidmann said that monetary policy is “too loose” from Germany’s viewpoint. But he also noted that as the country is in a “currency union”, the monetary policy decisions must “orientate” to the whole union. He urged that “this phase of low interest rates, this phase of expansive monetary policy, should not last longer than is absolutely necessary.” Meanwhile, he said that the crisis in eurozone “has not been overcome yet” and governments have the key in their hands.

Looking ahead, Fed Chairman Yellen would have a semi-annual monetary policy testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. Yellen is expected to reiterate that policy will need to remain accommodative for some time. Yet, she might be questioned about the medium-term outlook of tightening as the employment situation improves and inflation picks up. The BOC meeting will be held Wednesday and the central bank should stand on the sideline with the first rate hike possibly appears in 1Q15. The second Monetary Policy Review would also be released. In Asia, a series of Chinese economic data would be due Wednesday. GDP growth would probably stay at 7.4% in 2Q14, making the first half economic growth below government’s official growth target of about 7.5%. Retail sales, industrial production and fixed asset investments are expected to have expanded steadily. The RBA minutes for the July meeting would be released on Tuesday.

Here are some highlights of the week.

  • Tuesday: RBA minutes; BoJ rate decision; UK CPI, PPI; German ZEW; US retail sales, Empire state manufacturing, import price.
  • Wednesday: New Zealand CPI; China GDP; UK employment; Swiss ZEW; Eurozone trade balance; BoC rate decision; US PPI, TIC capital flow, industrial production, NAHB housing market index, Fed’s Beige Book
  • Thursday: Eurozone CPI; US new residential construction, jobless claims, Philly Fed survey
  • Friday: Canada CPI; US U of Michigan sentiments

Daily Pivots: (S1) 101.21; (P) 101.29; (R1) 101.38; More…

As noted before, current development suggests that the consolidation pattern from 100.75 is still in progress and USD/JPY is not ready to take out 100.62/85 key support zone yet. intraday bias is mildly on the upside for 102.26 resistance first. Break will target 102.79 and above. Meanwhile, below 101.06 will turn focus back to 100.65/82 support zone.

In the bigger picture, medium term up trend from 75.56 is in form of a five way impulsive move with rise from 96.56 as the fifth leg. There is no confirmation of reversal yet but a medium term top should be near, if not formed. Decisive break of 100.61 support will argue that USD/JPY has already topped out in medium term at 105.41 and should bring deeper fall back to 38.2% retracement o 75.56 to 105.41 at 94.00. In case of another rise, we’ll focus on reversal as it approaches 50% retracement of 147.68 to 75.56 at 111.62.

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