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DailyFX
Forex: Euro Rally Versus US Dollar on Pause While Yen Continues to Slide
Christopher Vecchio

ASIA/EUROPE FOREX NEWS WRAP

Yesterday’s potential groundbreaking European Central Bank policy meeting produced a massive rally by high beta currencies and risk-correlated asset; however, there’s been little continuation of this move today. The US Dollar has emerged as the top performer thus far through Friday, as investors take profits and reconsider positioning as various major currencies hover near pivotal levels ahead of next week.

There are two main focuses in FX right now: will the Japanese Yen onslaught continue; and whether or not the Euro is at a fundamental turning point. With respect to the first point, Japanese Prime Minister Shinzo Abe has stepped up his rhetoric for the Bank of Japan to implement a +2.0% yearly inflation target, meaning that speculation about potential policy changes will continue to run high until the January 22 policy meeting. As the meeting approaches, however, it is worth pointing out that the Japanese Yen is simply a very oversold currency. In fact, according to the CTFC’s COT report, net non-commercial futures positioning is at its shortest level since July 2007; the short trade is very crowded. A look at the weekly chart shows that the USDJPY hasn’t posted a negative period since the first week of November. In fact, last week’s RSI was above 80 – the last time that happened was in December 2005, which produced a pullback of >500-pips. Accordingly: seeing the Japanese Yen bottom (xxxJPY pairs top) after the BoJ would not be surprising; the conditions are ripe for a significant turnaround.

In terms of the Euro, the shift in rhetoric by ECB President Mario Draghi from ‘this is a financial crisis’ to now ‘this is an economic-growth crisis’ signals what could be a shift in policy making. Indeed, with no governments requesting a rate cut, a period of calm has descended on Europe. With the US budget negotiations set to reenter the conversation in a few weeks, the Euro could be setting up for a solid 1Q’14.

Taking a look at European credit, there’s only been slight follow through after yesterday’s strong performance, which could be constraining the Euro. The Italian 2-year note yield has increased to 1.332% (+0.7-bps) while the Spanish 2-year note yield has increased to 2.055% (+4.3-bps). On the contrary, the Italian 10-year note yield has decreased to 4.129% (-1.9-bps) while the Spanish 10-year note yield has decreased to 4.859% (-1.2-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 11:55 GMT

JPY: -0.02%

CAD: -0.03%

EUR: -0.10%

CHF:-0.27%

AUD:-0.29%

GBP:-0.32%

NZD:-0.67%

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