Mid-Day Report: Yen Sharply Lower after BoJ Shirakawa Warned of Delayed Recovery

Japanese yen is sold off sharply across the board today after BoJ governor Shirakawa warned that economic recovery has been delayed from the expectation of first half of fiscal 2012/13. Shirakawa said that Yen has shown "upward moves due to broad euro selling" as impact of the sovereign debt crisis. EUR/JPY weakness hurt corporate sentiments and erode Japan's export competitiveness. Earlier today, BoJ left rates unchanged at 0-0.1%, and it's asset-buying program at JPY 55T, as widely expected. In the accompanying statement, the bank noted that economic activate has been "more or less flat" due to "a slowdown in overseas economies and the appreciation of the yen". 2011 fiscal year growth forecast was lowered to -0.4% contraction while 2012 projection was lowered from 2.2% to 2.0%. 2012 and 2013 growth prospects were "broadly unchanged" and the bank expect economy to return to moderate recovery in first half of 2012 fiscal year.

Elsewhere, Euro is mixed despite successful Spanish bond auction and positive economic data. Spain sold EUR 2.51b of bills today, meeting maximum target of EUR 2.5bv. The three-month bills was at average yield of 1.285% versus prior 1.735% in December. The six-month bills was at average yield of 1.847% versus prior 2.435%. Demand was solid with bid-to-cover ratio of the three month debt and six-month debt at 4.32 times and 6.87 times respectively, stronger than prior 2.86 times and 4.06 times. PMI data from Eurozone showed more than expected improvement. Eurozone PMI manufacturing improved to 48.7 while PMI services rose to 50.5. German PMIs were strong with manufacturing PMI rose to 50.9 while services PMI rose to 54.5.

Euro is weighed down by uncertainty over the Greek situation after Eurozone finance ministers rejected private investor's proposal on the debt swap deal. Greek finance minister Veneizelos insisted that the negotiation is entering the final stretch and he believes that "everyone has now realized that Greece must be supported in its effort, which is of vital importance not only for us but for the euro zone as a whole and the global economy." IMF chief Lagarde said she's "determined to be positive".

But clearly, the common ground between private bond holders and EU are not found yet. IIF has said they made the "maximum" offer already but Dutch Finance Minister Jan Kees de Jager said the offer would leave's debt "substantially above 125% of GDP in 2020, missing the target of 120% of GDP. Luxembourg Prime Minister Jean-Claude Juncker said that the Greek program is "off track" and he demanded new coupon rate to be below 3.5% until 2020 and below 4% over the full 30-year period. IMF also raised the concern that the proposed plan would leave Greece with higher than expected debt burden. Venizelos expects to present a formal offer to creditors by February 13.

Other data released today saw Canadian retail sales rose 0.3% mom in November with ex-auto sales up 0.3% mom. Eurozone industrial new orders dropped -1.3% yoy in November. Australia conference board leading indicator dropped -0.3% in November.

BoE policy maker Adam Posen said that outlook has improved a little since BoE restarted quantitative easing back in October but the problems are not solved yet. Posen said a "big problem" is people's reluctant to "take on risk investments", including "the West" and Japan. Meanwhile Posen also noted that if new forecasts for growth and inflation justify, the bank would expand the GBP 275b easing program.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 76.89; (P) 76.98; (R1) 77.11; More...

USD/JPY soars to as high as 77.78 so far today and the strong break of 77.31 resistance confirms that whole decline from 78.22 has finished already. Also, the current development revives the case that corrective fall from 79.52 is already finished with three waves down to 76.55. Intraday bias is back on the upside for 78.22 first. Break will confirm this bullish case and target a test on 79.52 next. On the downside, 77.24 will mix up the picture and turn bias neutral first.

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.

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