Daily Report: Yen Jumps Further on Falling Stocks, Commodities and Yields

The Japanese yen continues its strong momentum broadly today on risk aversion. Nikkei fell another -276 pts to 9549 following yesterday's -200 fall in DOW. Crude oil dipped below 67 level in Asia while Gold also breached 920 level. Dollar strengthens against commodity currencies but remains bounded in range against Euro and Swissy. Yen is only currency that display broad based strength today, and has so far climbed over 4% against Aussie this week and over 3.5% again Kiwi. The developments in Yen, Stocks and Treasury yields will remain the major focus in near term.

EUR/JPY and AUD/JPY are now trying to draw support from medium term rising trend line now. But this time, the situation is difference as clear bearish divergence conditions are seen in daily MACD in both crosses. While some initial support might be seen from the trend lines, the recovery will likely be weak and brief. We're anticipating that both crosses will take out trend lines decisively eventually to confirm reversal and bring another round of persistent yen buying. The development in GBP/JPY is support this case too as the cross is likely completing a head and shoulder top formation (ls: 160.44, h: 162.56, rs: 159.58) Sustained break of 154.85 support will confirm this case and add more credence to the yen bullish view. The tricky one is USD/JPY which we're still expecting it to bottom somewhere between 93.84 and 94.44 and it should be the one to avoid in either case of yen strength of pull back.

To solidify the above view, let's take a look at stocks, which have close correlation with yen crosses. While DOW and Nikkei are still holding above some key near term support levels, upside momentum is clearly lost as seen in bearish divergence conditions in both daily charts. The steep fall in and gap in Nikkei today is arguing that the fall from June's high of 10170 is developing into something of impulsive nature. Similar picture is seen in DOW which should have topped earlier in Jun at 8877. Focus will now turn to 8000 level of DOW and 9000 of Nikkei to double confirm the medium term yen bullish case.

On of the key factors that would affect the above case is development in the treasury market, considering there will be a massive auction this week. As noted yesterday, yield of 10 year note, which has close correlation with yen crosses, gapped down and showed a pattern of island reversal which suggests further downside in yields at least in near term. Falling yield is believed to be one of the driving force in the weakens in yen crosses. US Treasury will auction $40 billion in 2 year notes today as part of a record $104b sale of debt this week. It will also off $37b of 5 year notes tomorrow and $27 b of seven-year securities on Thursday. The results will be closely watched by all investors on indication of markets' willingness to fund US's enormous budget deficit. The overall implications to markets are quite complicated but in the end, the impact on yields and subsequent impact on the forex markets will be paid attention to.

On the data front, Germany Gfk consumer confidence for Jul improved further from revised 2.6 to 2.9. Swiss trade surplus narrowed from 2.55B to 2.01B. Advanced reading of Eurozone PMIs will be the main feature today and are both expected to show further improvements. Existing home sales in US is expected to rise 2.6% to 4.80M in May while house price index is expected to show -0.3% mom fall in April.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 155.75; (P) 157.32; (R1) 158.24; More.

GBP/JPY falls sharply to as low as 154.35 today and the brief break of 154.85 support argues that the cross might have completed a head and shoulder top reversal pattern (ls: 160.44, h: 162.56, rs: 159.58). Intraday bias will now remain on the downside as long as 157.05 minor resistance holds. Sustained trading below 154.85 will confirm that a short term top is at least formed and bring deeper fall to trend line support (now at 151.07) and then key support level at 143.00. On the upside, however, a break above 157.05 minor resistance, without sustained trading below 154.85, will dampen this case and indicate that GBP/JPY is merely developing into sideway consolidation. Retest of 162.56 should be seen in this case.

In the bigger picture, medium term rise from 118.81 is treated as correction to the fall from 215.87 and is expected to conclude in 155.88/167.34 resistance zone (38.2% and 50% retracement of 215.87 to 118.81). Break of 154.85 support will starts to argue that such correction has completed at 162.56 already. Sustained trading below channel support (now at 150.34) will add much credence to this case and will likely encourage a retest of 118.81 low at least. However, before that, another rise cannot be ruled out. But after all, we'll continue to look for reversal signal even if such rally will extend.

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