Daily Report: Markets Split, Yen and European Majors Strong

The markets are split for the moment. On the one hand, Japanese yen has been impressively strong as boosted by mild risk aversion. Nikkei dropped -2.86% to close at 9408 today as Google reported lower than expected earnings. Yen is also helped by the sharp fall in treasury yield where yield on 10 years note dived back 2.978% overnight. Yen's strength is limiting rally in commodity currencies against dollar, which were also pressured by disappointing CPI data from New Zealand. On the other hand, European majors remain firm as this week's bond auctions showed that Eurozone is overcoming its debt crisis. Rally in EUR/USD and GBP/USD is still set to extend further.

Regarding some of recent disappointing economic data, Richmond Fed Lacker said that he "would not be surprised to see somewhat choppy economic reports for a time." "This pattern is not at all inconsistent with moderate growth -- one can’t always be better than expected, after all -- so it’s wise not to overreact to every crosscurrent in the data flow." Though, he expects "consumer spending and business investment are going to continue to be strong enough to keep growth in overall activity on an upward trajectory." Also, Lacker said that the a relapse into a recession is "quite unlikely".

French Prime Minster Francois Fillon said that Euro is still a "very strong currency" and the current rate is "quite in conformity with the situation." Recent crisis is "not a crisis of the euro" but a "crisis of sovereign debt, which we are now resolving."

On the data front, New Zealand CPI missed expectations and rose only 0.3% qoq in Q2, with yoy rate moderated from 2.0% to 1.8% and cool down speculations for July hike from RBNZ. Japan Tertiary industry index dropped -0.9% mom in May. Eurozone trade balance, Canada leading indicators, US CPI, TIC capital flow of U of Michigan sentiment will be released.

NZD/JPY is so far the weakest pair today. The sharp fall from this week's high of 64.27 suggests that a temporary top is formed and we might seen some sideway trading in near term. Whole consolidation pattern from 58.64 is possibly still in progress and another rise could still be seen to 65.28 resistance before the consolidation concludes. But after all, note that the path of the consolidation would be choppy and we'd tend not to trade the pair inside range of 58.64 and 65.28 and look for opportunity to sell near to 65.28 for another medium term fall to below 58.64.

USD/JPY Daily Outlook

Daily Pivots: (S1) 86.91; (P) 87.71; (R1) 88.18; More.

USD/JPY drops further today and is now pressing 86.96 support. Break will confirm that recent fall from 94.97 has resumed and should target 84.81 low next. On the upside, above 80.02 minor resistance will turn intraday bias neutral first. But we'd expect recovery to be limited by 89.14 resistance and bring another fall.

In the bigger picture, the break of 88.13 support confirms that medium term rebound from 84.81 has completed with three waves up to 94.97 already. The corrective structure in turn indicates that whole down trend from 2007 high of 124.13 is still in progress. Retest of 84.81 should be seen next and break will confirm down trend resumption for next key level of 79.75 (1995 low). On the upside, break of 94.97 resistance is needed to be the first sign of medium term reversal. Otherwise, we'll stay bearish.

Economic Indicators Update

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