The FX market remains contained as participants continue to digest the U.S. Fed’s Chairman Bernanke’s testimony to lawmakers this week, in which he reiterated an end to economic stimulus with no timeline mentioned. The market seems to want to position itself for tapering sooner rather than later. Under these conditions the mighty greenback should be well supported. If nothing else, Ben’s dovish tone should keep the USD’s price action relatively contained in the near term, as investor focus gradually begins to turn towards this July’s FOMC meeting.
This weekend, Asian price action will be influenced by the outcome of the Japanese Upper House elections on Sunday. Analysts are predicting USD/JPY to rally on an expected LDP win. Future forecasting suggests that the ruling Liberal Democratic Party, (LDP)/New Komeito coalition, is likely to win at least 63 of the contested seats, thereby securing an overall majority (122+ seats) and putting an end to the “divided Diet”. The elections outcome will help the market to understand the strength of PM Abe’s reform agenda.
Other data revealed that Japanese cash outflow hit a nine-month high last week. Japanese investors bought foreign bonds for the second week in a row, bringing the total to +¥2trn. In hindsight, this is the largest outflow recorded since the BoJ unveiled a massive expansion in its QE program last April. Foreign investors bought +¥398b of Japanese equity, down slightly week-over-week (-¥87b).
The market seems already positioned for a good outcome in the Upper House elections. To many, the hurdle for the elections to produce significant immediate price action in USDJPY is probably higher. Political pundits believe that any significant policy changes that should impact the yen will probably have to wait for a couple of months, when an extraordinary Diet session is likely to be convened. Abe’s administration has no new economic policy initiatives that are being held up by the political process and the BoJ’s Kuroda has no immediate reason to act. The tech scribes now see that if USDJPY is willing to stay above 99.46 they can see an immediate risk higher for a retest of key price/retracement resistance at 101.54/64.
Euro data is thin on the ground this Friday, the first of a two-day meet by G20 finance ministers in Moscow. The host, Russia, has indicated that the leading members from the industrialized and developing nations will be working on a common approach to QE programs to avoid market volatility in the future. The group will formulate an agenda for discussion by the group's meeting of leaders in September. Ministers will be working out a “comprehensible criteria” for when and how such programs can be tapered – in other words, an exit strategy with little mess were stimulus markets should be predictable!
Some backwardation data reveled that Italian industrialized orders rose in May (foreign +4%, Domestic +2.6%) for the third-consecutive month. The country still remains the eurozone's number two manufacturing economy. With orders acknowledged as a proxy for sales, the Italian headline could suggest that the country’s export led economy may finally be exiting the recession that began two-years ago.
With little noise there has been very little EUR movement. So far, only the shorts have been burned. A heavy EUR yesterday had the bears hoping for a “stop-hunt” below the technical support level 1.3050 – but that did not materialize. With the Portugal government surviving a “no” confidence vote and pundits predicting Yellen as the next Fed head provided the 17-member single currency some relief. The tight ranges coupled with little trader interest suggest that this market is gearing up for its annual summer lull in early August. Most of the market move this morning has been left hand side, led mostly by EUR/GBP stop interest below 0.8600. The knock on effect happened to trigger some outright LHS stop movement. So far, the market has pegged the range at 1.3065-1.3155 until further notice.