Forex Trading Analysis - Nikkei Sinks Yen Rallies

What We Are Watching
France Gets Eurobond Frenzy
Bank of Japan Sits Pat
UK MPC Minutes
EU Economic Summit
US New Homes Sales

Nikkei Sinks Yen Rallies

If you are a Yen Forex trader, then you are probably used to these moves, but the currency again showed its elusiveness by falling on negative Japanese news, only to rally on more bad news.   What are we talking about?  Credit rating agency Fitch hit Japanese Sovereign debt yesterday with a negative outlook which sent the USDJPY flying higher to 80.15 from just below 79.50.  The Bank of Japan than decided to stand pay and held off from announcing more monetary stimulus at their overnight policy meeting.  The double whammy triggered a 2.15% loss in Nikkei shares, with selling accelerating after the Bank of Japan’s inaction.  Nonetheless, the BoJ news helped the Yen erase its earlier losses to cause it to trade back around 79.50.  

Looking ahead this is what you need to remember when trading the Yen.  Bad news = weaker yen or Bad news = stronger yen, Good news = weaker yen or Good news = stronger yen.  

Makes sense? Yes, and this is why.  

The Japanese Yen isn’t about you and me and the rest of the world’s retail Forex traders.  Its about Japanese exporters and financial companies.  When you hear about the Yen being a “safe haven” its about Japanese companies feeling less safe with the rest of the world’s financial prospects, which causes them to repatriate cash and lead to Yen strength.

Japanese domestic isn’t as important as overall global economic trends.  As such, when Japanese firms feel that there is money to be made with their export sales to the rest of the world, they will sell Yen and invest resources elsewhere, either by opening new factories, advertising, or hiring.  

The above reason is why the USDJPY ripped from 76.00 to 84.00 in February to March as US economic figures started to peak and it appeared that the country would be able to continue with its steady growth in the face of EU worries.  

That being said, as long as the Bank of Japan isn’t out printing new Yen, overall Yen strength could remain solid as Japanese companies see little reason around the world to expand their sales streams aggressively.  

EURUSD

The two things to watch here are the EURUSD’s 2012 low of 1.2640 and Eurobond talk.  After falling hard yesterday, the pair continues to be moving lower today, and only found support after trading near last week’s low of 1.2640.  As such, even if there is demand at the 1.2600 figure currently present. We could see Forex traders getting aggressive with their selling if 1.2640 is broken.

On the fundamental side, the EU is holding an informal Summit today.  Not sure what formal vs informal means, probably about how many people get to get flown out and their countries expense.  In any event, the big talk now is Eurobonds again, where its Germany against the rest of the EU, especially France.  Basically, while Germany has agreed to higher levels of cross border backing of sovereign debt, they understandingly want to limit their responsibility to the rest of EU’s debt obligations.  While nothing is expected to get hammered out at today’s Summit, any increase of tension between EU leaders could add more uncertainty to the region (IE, Forex traders will be selling the EURUSD first and asking questions later).

Intraday Support/Resistance  1.2640/1.2700

GBPUSD

The GBPUSD failed to hold 1.5800 support yesterday following a lower than expected CPI reading.  Today, Forex traders are awaiting MPC Minutes data from the Bank of England.  It was last month’s hawkish tone from the MPC Minutes that triggered a multi week rally in the Pound.  As such, Forex traders will be watching to see if the BoE members have changed their views in light of worsening trends in overall Europe.  SwiftTick’s view is that although consensus appears to be against the BoE sticking to a hawkish tone, we expect the overall improvements in the UK jobs sector to keep the central bank from becoming too dovish.  

Intraday Support/Resistance  1.5730/1.5845