Yen: Late wake-up to rate differentials

EUR USD (1.2740)
The European session started on Monday morning with the single currency slowly continuing its drift lower to 1.2720. This happened in the absence of any fresh impetus that could send the euro in any direction. It was only, the by now old non-farms payrolls number, which was still echoing through the market. Curiously, traders applied exactly the same argument that they used as a reason to buy on Friday to sell the single currency yesterday. They already started shifting the attention on Friday afternoon to the hourly earnings, which could signal a continuation of the Fed tightening cycle to keep inflation under control.

Nevertheless, the reluctance of the medium-term crowd to do anything last week hinted that short-term traders were largely the ones who participated in the euro’s rally. Despite the single currency having gained two per cent over the course of the last week, our latest Euro-Sentiment Survey* revealed no change in the level of optimism. Only a meagre one per cent shift from the unchanged camp into the bullish and bearish camps respectively. This also
implies that the outlook for the euro has not changed much either. We can now only expect good demand from medium-term market participants beyond
$1.30. At the lower end, a one per cent dip is more than likely necessary to attract some profit-taking. In addition, long-term bids are also expected to reappear on lower levels again.

Although yesterday’s euro weakness was sturdier than expected, it does not justify an overall bearish outlook. For this reason, we would try a bullish strategy at 1.2690 for an objective at 1.2930/40. The risk-limit will then be relatively tight at 1.2660/70. The latter also marks the last good near-term support.

USD JPY (114.50)
With China’s trade surplus also having hit record highs, it convinced some market participants that the pressure is on for a stronger renminbi. In addition, with speculation still rife about Japan ending its zero interest rate policy on Friday, those who wanted to buy the yen had ample reason to do so.

These arguments also followed the yen on its way up yesterday. However, some cracks quickly appeared around the Japanese rate hike argument as the dollar changed direction. It seems as if it finally dawned on traders that a rate hike on Friday will not do much after all to close the yield gap between the two currencies.

Nevertheless, after the initial dip to 113. 45, the dollar staged a big figure recovery. But for risk-reward considerations we keep the position neutral. For today supports are visible at 113.10 and thereafter at 112.75. At the former we would implement a positive strategy with a limit below the latter. Resistances stand at 114.90 and at 115.40. In addition, a break beyond the last mentioned point would signal an immediate recovery.

EUR JPY (145.40)
The single currency retreated more than two big figures to almost 145.00 yesterday from its recent 147.40 all-time high. The cross remains unstable for the time being, with room to weaken to 144.05 and then to 142.90. On the upside, we expect to run into resistances at 146.70 and at 147.30.

EUR GBP (0.6920)
The cross continued its downswing, but it still finds itself in a neutral position. To the downside, we expect to run into supports at 0.6895 and then at 0.6855. Twenty ticks ahead of the latter, we would take advantage of a bullish strategy. Today’s supply points are located at 0.6945 and 0.6980.

GBP USD (1.8420)
In the UK producer output prices ticked up while house prices were up year-on-year in May. Cable retreated below our 1.8400/10 limit yesterday (apologies) and finds itself in neutral territory again.

To the downside, we expect to see some buying interest at 1.8350/60 and thereafter at 1.8275. Only below the second point do we anticipate that the demand situation will become thin. Overhead, supply is lurking at 1.8540. A break beyond there will signal that another upside attempt is underway towards 1.8775.

AUD USD (0.7525)
The current target remains 0.7595. The Australian business conditions index came in stronger this morning. Aussie was buoyant as some traders interpreted this as pointing to another RBA rate hike in August. On its way up, we reckon with resistance at 0.7535 and we even envisage the move to accelerate beyond there. Any dip should not violate our 0.7455 risk-limit to the bullish orientation. To the downside, additional support could be expected at 0.7430.