Forex: Tales From The Currency War

Includes: ERO, JYN
by: FXstreet

After flirting with the 100.00 frontier during the Thursday session, the USD/JPY traded lower on Friday to the 98.60 region, and at the end of the American session the pair was ready to close the week at 99.00. But suddenly the U.S. Treasury took the scene and affirmed that the U.S. "will closely monitor Japan's currency policy" and will press on Japan to refrain from its Yen devaluation.

The USD/JPY collapsed around 80 pips in a few minutes, to test intra-week low area at 98.10, where it bounced to close at 98.40. The pair fell 1.20% on the day and remains strongly bearish according to the trend index. As for the short term, MACD, CCI and Momentum indicators are pointing lower in the 1-hour chart. But in the wider 1-day picture, same indicators are positive.

Heat Map usd jpy

According to the official statement, Japan should refrain from competitive devaluation. The Treasury said the U.S. will press Japan to refrain from the devaluation as the Nippon country must use only domestic instruments for monetary.

But, Which part of "U.S. will be monitoring Japan on Yen policies" is not obvious? All central banks are monitoring other central banks all the time. The news here is that they say U.S. "will press Japan" to take what they believe is the right way. However, in the case where Japan rejects the Treasury's advice, will the Fed devalue the USD? Currency war? By the way, United States declined to named China a currency manipulator.

Is the Yen weakness benefiting the EUR/USD?

In the meantime, what are the BoJ program's effects on other currencies? In the EUR/USD there are a lot of opinions. If you see the ING Bank analyst team, they state that "suggestions that even EUR may benefit from JPY weakness seem improbable given the Eurozone's other problems including the ongoing credit crunch."

Early on in the week, Sebastien Galy, Senior FX Strategist at Societe Generale stated that the euro may be replacing the JPY as a funding currency and it could be creating a short covering that boosts EUR. That opinion was shared by Emmanuel Ng of OCBC Bank, who notes that in the near term, market talk of diversionary investment flows out of Japan may benefit the EUR for as long as system tail risks remain under wraps.

Danske Bank research team is contrary to UBS too, as they point out that "the aggressive BoJ easing is not just JPY negative but, at the same time, also EUR positive through its effect on European government bond markets." Danske Bank expects "these flows combined with the fixed income market becoming less eager to price a swift Fed exit on the back of US soft patch to prop up EUR/USD towards 1.33 on a 3M horizon."

The EUR/USD recovered ground from early losses on Friday to trade above the 1.3100 level to trade at intra-day highs at 1.3125. The pair closed the week at 1.3105. According to the trend index, the pair is slightly bullish with indicators such as CC and Momentum pointing north while the Stochastic and MACD are going neutral in the 1-hour chart. In the 1-day picture, CCI and Momentum are bullish, MACD neutral and Stochastic bearish.

Heat Map euro dollar

As for the short term, above 1.3100, a surpass of 1.3138 (high Apr.11) would open the door to 1.3140 (MA55d) and then 1.3150 (MA100d). On the downside, immediate support at 1.3044 (low Apr.11) followed by 1.3006 (low Apr.9) and finally 1.2980 (MA10d).

Finally, Scotiabank states that the Bullish bias persists in EUR/USD, GBP/USD and USD/JPY. According to E.Theoret, Strategist at Scotiabank, the outlook for all three major crosses is bullish: in the case of the euro, "signals are in buy, but spot's failure to close above the 50day MA is a concern". Regarding the sterling, he added that "all signals also in buy territory; we favor long positions". For the USD/JPY, "all signals in buy territory, a break above 100 is likely to accelerate buying".

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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