Daily Report: Yen Extends Gain, Dollar in Range ahead of FOMC

Yen strengthens broadly in Asia today as China's Securities Times reported that regulators have ordered banks to call back some of the loans they extended in January. Investors continue to be concerned with more tightening measures from China to cool inflation. Dollar is staying in tight range while crude oil and gold continue to consolidate above recent low of 73.82 and 1081.9. Markets are cautious on event risks including FOMC announcement, and US President Obama's speech. In particular, focus will be on any comments from Obama on the bank proposal which rocked the financial markets last week.

Fed is expected to keep the policy rate unchanged at 0-0.25% at the January meeting. While there have signs showing improvement in economic outlook, job markets remained the area the Fed concerned the most and Fed will wait until unemployment rate has dropped substantially before considering rate hikes. In December, the Fed said there were plans to discuss alternative approaches to implementing monetary policy in the longer-run. While these comments were rather bearish, we believe policymakers' purpose was to suppress market speculations on premature exit. More in FOMC Preview: Current Conditions Warrant Low Interest Rates.

On the data front, Australian dollar was supported by stronger than expected CPI reading in Q4. CPI rose 0.5% qoq, 2.1% yoy, above expectation of 0.4% qoq, 2.0% yoy. Japan trader surplus was unchanged at 0.52T JPY. New home sales from US will be released later today and is expected to rise slightly to 370k annualized rate in December.

While Australian dollar is relative firm against European majors, it cannot resist yen's strength so far. AUD/JPY dropped sharply from 86.17 and is now consolidating above 80 psychological level. At this point, it's still a bit early to call for medium term reversal. But short term weakness is anticipated nevertheless to trend line support at 78.9. Note that sustained break there will be an important indication that whole medium term rise fro 55.11 has completed and will turn outlook bearish, inline with other yen crosses. Above 82.27 resistance is needed to be first sign of stabilization. Otherwise, risk will remain on the downside.

Looking at the dollar index, intraday bias remains cautiously on the upside as long as 78.32 minor support holds. Pull back from 78.81 might have completed at 78.03 already. And break will confirm whole rise from 74.19 has resumed for 61.8% projection of 74.19 to 78.45 from 76.60 at 79.23 next. However, a break below 78.32 will indicate that consolidation from 78.81 is still in progress. Though, even in case of another fall, downside is expected to be contained above 77.41 support and bring rally resumption.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 143.41; (P) 145.34; (R1) 146.62; More

GBP/JPY drops further to as low as 143.62 so far today and at this point, intraday bias remains on the downside for 141.99 support next. As noted before, whole sideway consolidation from 139.69 might have completed at 150.68 already and decline from 163.05 is possibly resuming. Break of 141.99 support will further affirm this bearish case and target a retest on 139.26 next. On the upside, above 144.99 minor resistance will turn intraday bias neutral and bring recovery. But upside should be limited by 147.25 resistance and bring fall resumption.

In the bigger picture, medium term rebound from 118.18, which is a correction to the long term down trend from 07 high of 251.90, has completed at 163.05 already. Fall from 163.05 is possibly resuming as consolidation pattern from 139.69 has likely finished at 150.68 already. Break of 139.26 will confirm this bearish case and target 61.8% retracement of 118.81 to 163.05 at 135.70 next. Break will further affirm the case that whole down trend from 2007 high of 251.90 is resuming for another low below 118.81. This will remain the preferred view as long as 150.68 resistance holds.

Economic Indicators Update

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box