Daily Report: Yen Building Up Momentum, ECB and BoE in Focus

Dollar was sold off sharply overnight as commodities strengthened with crude oil breached 81 level while gold breached 1140 briefly. Nevertheless, the greenback is still kept above well above key near term support levels against European majors as expected. AUD/USD also struggled to take out 0.9070 resistance decisively. There is basically no change in the view that dollar is generally in consolidation only and even in case of another fall, downside should be relatively limited. One exception is versus the Japanese yen where USD/JPY is clearly in a down trend that's still in progress. Indeed, the Japanese yen is gathering momentum in early European session and we'd probably see a retest of recent lows in EUR/JPY and GBP/JPY later today.

NZD/JPY has indeed break last week's low of 60.88 today and is set to resume the whole decline from 68.62. We'd expect further decline in near term to key cluster support level of 59.85 (38.2% retracement of 44.19 to 69.70 at 59.95) which is close to 60 psychological level. Note that sustained break there will strongly suggest that medium term corrective rebound from 2009 low of 44.19 is completed and we'd then be seeing much steeper decline going forward.

Main focus of today is on BoE and ECB announcements. The upcoming ECB meeting is the focus of the week as the President Trichet has mentioned several times that more detailed money market measures will be announced at the March meeting. Given the negative impacts of Greece's sovereign crisis and sluggish economic data released since the previous meeting, we believe the measures will not be drastic and the policy rate will stay unchanged at 1%. ECB staff will also publish a new set of economic forecasts. Again, we expect only modest changes from previous projections. More in ECB to Drain Liquidity Gradually.

The BOE is expected to continue its 'wait-and-see' stance in monetary policy. The central bank should unanimously vote for keeping the official Bank Rate paid on commercial bank reserves at 0.5% and continuing with its program of asset purchases totaling 200B pound. The Committee will continue to monitor the appropriate scale of the asset purchase program and further purchases would be made should the outlook warrant them. More in BOE to Stay Sidelined as Inflation Remains Strong in the Near-term.

On the data front, Japan Q4 capital spending dropped less than expected by -17.3%. Australia trade deficit narrowed to AUD -1.18b. Eurozone Q4 GDP is expected to be unrevised at 0.1% qoq, 02.1% yoy. Canada building permits are expected to rise 1.2% mom in Jan. Ivey PMI is expected to rise to 56 in February. US jobless claims will receive much attention and is expected to drop to 475k. Pending home sales is expected to rise 1.5% mom in January while factory orders are expected to rise 1.2% in January.

Looking at the dollar index, while the fall overnight was sharp, there is no change in the view that it's merely part of the consolidations that started at 81.34. Hence, even in case of more decline, downside is still expected to be contained by 79.56 cluster support holds (38.2% retracement of 76.60 to 81.34 at 79.52) and bring rally resumption eventually. Above 80.55 minor resistance will flip intraday bias back to the upside for retesting 81.34 high first.

USD/JPY Daily Outlook

Daily Pivots: (S1) 88.19; (P) 88.59; (R1) 88.86; More.

USD/JPY's fall is still in progress and reaches as low as 88.13 so far today. Intraday bias remains on the downside for 87.36 support next. Break there will confirm that whole rebound form 84.81 is finished at 93.74. Also, in such case, the larger down trend is likely resuming for a new low below 84.81. On the upside, above 88.63 will turn intraday bias neutral and bring consolidations. But short term outlook will remain bearish as long as 89.51 resistance holds and another fall is still expected.

In the bigger picture, note that USD/JPY is now back below 55 days EMA (now at 90.44) and continue to stay below 55 weeks EMA (now at 93.42). The bearish case that longer term down trend from 124.13 is still in force remains in favor. Break of 87.36 support will solidify this case and target a new low below 84.81, possibly to 1995 low of 79.5. On the upside, note that decisive break of 93.74 resistance will also have 55 weeks EMA (now at 93.42) firmly taken out too and that will be an important signal that whole long term down trend from 2007 high of 124.13 is over. In such case, focus will turn to 101.43 resistance for confirmation.

Economic Indicators Update

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