Mid-Day Report: Yen Rally Continues as Risk Pulls Back Following US GDP Disappointment

Yen continues to strength in early US session in otherwise ranging market as risk rally pulls back following GDP disappointment. Q4 GDP in US showed 2.8% annualized growth, strongest pace in 1.5 years but missed expectation of 3.0%. DOW opened lower today and remains pressured at the time of writing. USD/JPY dips further to as low as 76.76 so far while GBP/JPY is also heading back to 120 level. As noted in prior reports, DOW is facing strong resistance from 2011 high at 12876 and is vulnerable for a pull back after the rally since December. When that happens, USD/JPY could possibly be dragged below key near term support of 76.55.

Euro is relatively steady after solid Italian bill auction. Italy sold EUR 11b of six-month bills today at yield of 1.97%, well below 3.25% in December and 6.5% in November. The result lifted some optimism for Monday's auction of EUR 8b of 5- and 10-year bonds. Nonetheless, the strength in Euro remains limited by uncertainty in Greece. The negotiation between Greece and IIF continues and there is no clear solution yet even though EU Commissioner Rehn expressed his optimism that a deal is imminent.

Meanwhile, it's reported that Greek PM Papademos distributed a 10-page document from Troika to his ministers. The document included a list of measures recommended to be enacted by Greece. Among the list, the most important one is to pass a supplementary budget with additional austerity to meet fiscal targets in 2012, with sharp cuts in defense, health and redundant state entities. Also, troika is pressing Greece for reform of supplementary pensions and urged Bank of Greece to finish the assessments of Greek banks' capital shortfall.

Other data released today saw US U of Michigan consumer sentiment revised up to 75 in January. Swiss KOF leading indicator dropped more than expected to -0.17 in January. Eurozone M3 rose 1.6% yoy in December. New Zealand unexpectedly posted trade surplus of NZD 338m in December, versus expectation of NZD -50m deficit. Japan national CPI fall less than expected by -0.1% yoy in December but Tokyo CPI dropped more than expected by -0.4% yoy in January. Retail sales rose 2.5% yoy in December.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 77.22; (P) 77.51; (R1) 77.74; More...

USD/JPY drops further to as low as 76.71 in early US session and intraday bias remains on the downside for 76.55 support. Break there will confirm resumption of whole fall from 79.52 and in that case, deeper fall would be seen towards 75.56 low. On the upside, though, above 77.17 minor resistance will turn bias neutral and extend recent sideway trading in range of 76.55/78.28 instead.

In the bigger picture, there is no sign of long term trend reversal in USD/JPY yet even though downside momentum is diminishing with bullish convergence condition in weekly MACD. USD/JPY is still trading inside the falling channel that started back in 2007 at 124.13, and below the falling 55 weeks EMA. Not to mention that it's far below the falling 55 months EMA. Rebound from 75.56 low could extend higher and beyond 80 psychological level. But it could turn out to be a corrective three wave rally in the end. So, we'd at least prefer to see sustained break of 55 weeks EMA (now at 79.60) before considering the case of reversal. And break of 85.51 resistance will need to confirm. Otherwise, anything happens now will be viewed as corrective and an eventual break of 75.56 low to 70 psychological level is still favored.

Economic Indicators Update

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