G7 countries intervene to reduce yen’s volatility

Last Friday, the G7 announced there would be a coordinated currency intervention in respect of the JPY. This announcement triggered a spike, from levels around Friday’s open of 79.08, up to 81.48. The USD/JPY currency pair than continued its drive upwards, in a more scaled fashion, to reach daily highs at 81.99. The yen, however, continued showing signs of strength but found support at 80.60, where it eventually closed last Friday evening.

This week, the pair traded in the 80.76 – 81.32 range; for the current week the 80.00 level should keep offering support, especially as the option for G7 intervention remains open. We see resistance in the 83.24 - 85.89 range with possible moves towards 83.00.

This G7 concerted intervention is perceived by the market as much more effective when compared to the BoJ’s intervention effort back in 2010. The G7 statement indicated currency intervention to weaken the yen would happen throughout last Friday but did not exclude it could also happen when necessary.

Up to the time of writing, the EUR/USD has traded in the 1.4139-1.4248 range this week; well beyond the 20-day moving average at around 1.3938. On the daily charts, the pair seems to be approaching 1.4282 which is the 100 per cent retracement of the move lower from the November 4, 2010 highs to the January 10, 2011 lows. Beyond 1.4282, the pair could be targeting 1.4372, the 76.40 per cent retracement of November 2009 highs to June 2010 lows. Eurozone debt problems started surfacing just after the November 2009 highs – when the Greek issues began.

Recent euro bullishness has been largely driven by rate hike expectations. However, if we assume that the ECB will likely proceed with caution when hiking its rates, it is possible that the market will be disappointed at some stage. The ECB will have to be cautious on hiking its rates because there are varying speeds of economic growth within the eurozone.

Furthermore, some peripheral countries are highly sensitive to debt refinancing issues and rises in interest rates might create further pressure on these countries. The ECB’s caution in raising rates and the likeliness that EZ debt issues will resurface are expected to create resistance and some possible correction for the single currency’s recent rise.

The USD, on the other hand, will likely also be held back due to the Fed’s easing policy contrasting sharply to other hawkish central banks’ policies. Apart from this, the United States, at some point in time, is expected to have to face its own debt issues.

Data from the United Kingdom released Tuesday showed that monthly CPI for February came out at 0.7 per cent against an expected 0.6 per cent and a previous 0.1 per cent. Yearly CPI for February came out at 4.4 per cent, higher than the expected 4.2 per cent and the previous 4.0 per cent. The actual yearly figure is currently a 28-month high.

The higher than expected inflation data revamped expectations of an earlier than expected rate hike from the BoE. As the data hit the wires, the GBP rose from around 1.6360 to reach 1.6400 against the USD. After the release, the GBP also gained against the euro. The EUR/GBP dived from around 0.8708 reaching 0.8681 and later reached even lower. Forex traders eagerly awaited the minutes from the BoE’s last policy meeting that were due the following day. More hawkish signs were expected to provide even more support for the GBP.

Gold resumes its bullishness after hitting lows of $1381.00 per ounce on March 15. At the time of writing, gold has made daily highs so far of $1,432.20 per ounce; the precious “safe haven” metal seems to be re-approaching all time highs of $1,444.75 per ounce reached earlier this month.

For the current week, we see resistance in the region of $1,440.80-$1,463.05 and support at $1,388.65 - $1358.75. Despite the ECB’s hawkishness and the likelihood it will turn to raising rates very soon, gold has so far stuck to its bullishness.

One would usually expect gold prices to start easing as interest rates start to rise but analysts are not expecting the ECB to hike rates enough to compensate for the higher inflation levels given the frail economic recovery and the troubled peripheral eurozone countries who keep struggling with debt problems.

The volatility and uncertainty clouding the global economic recovery coupled with Middle East and North African unrest are also a catalyst for the traditional safety appeal gold holds. In addition, rising inflationary pressure will also keep supporting gold. Gold could be eyeing $1,500 per ounce in the coming months.

Upcoming FX Key events:
Today: EU Summit, EZ PMI, UK Retail Sales & US Durable Goods Tomorrow: EU Summit, French GDP, German GFK Consumer confidence Survey, US GDP & Core PCE.

FX technical key points:
EUR/USD is bullish, target 1.44, key reversal point 1.3428.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bullish, target 1.65, key reversal point 1.5800.
USD/CHF is bearish, target 0.8800, key reversal point 0.9400.
AUD/USD is neutral.
NZD/USD is neutral.

Please feel free to send any comments or feedback regarding our articles on [email protected].

RTFX Ltd (“RTFX”) is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

Mr Muscat is senior trader at RTFX Ltd.


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