Weekly Review and Outlook

Yen Broadly Lower in Mixed Markets, Greek Bailout Approval Anticipated on Monday

The Japanese yen was overwhelmingly weak in an otherwise rather mixed week. Greece continued to dominate headlines as the approval of the second bailout was once again delayed. The common currency was notably weak against other major currencies except versus yen. Meanwhile, risk markets ignored the situation in Greece and extended recent rally with DOW heading closer to 13000 psychological level. Crude oil jumped to as high as 104.14 before closing at 104.06 while the CRB commodity index is back in upper side of recent range. Commodity currencies strengthened against dollar but was basically kept in range to end the week. China's cutting of bank reserve requirement might give risk markets an initial boost this week but the sustainability is in questioned. Meanwhile, focus will also be on the anticipated approval of Greece second bailout on Monday and the development of the drama.

In short, markets are expecting EU finance ministers to finally approve the EUR 130b second bailout for Greece on Monday in Brussels after various delays. German Chancellor Merkel, Italian Prime Minister Monti and Greece Prime Minister Papademos held a conference call and Friday and optimism for the approve was being expressed after the call. The main focus will be on ECB's involvement. It's reported that ECB would realize profits on the bond holdings and channel back them to national central banks. And in that case, national banks could then use the fund to reduce outstanding Greek debt, which could reduce Greece's debt burden by EUR 15b, filling the gap in the bailout package. But again, we'd heard numerous so called solutions and it's not confirmed before it's confirmed.

A second development to note is the private sector involvement arrangements. It's reported that the PSI offer will be open for two weeks which should be just in time to complete before the massive EUR 14.4b bond redemption deadline on March 20. Meanwhile, Greek government is already drawing up legislation to active the collective action clause to impose losses on bondholders who don't participate in the voluntary program.

Also worrying investors is the economic outlook of Eurozone. The 17 nation eurozone's GDP contracted by -0.3% qoq in Q4 of 2011 and the contraction is expected to continue, which will drag Eurozone back into recession. Germany's GDP contracted by -0.2% qoq. France data was positive though, with an expansion of 0.2% qoq. Indeed, five Eurozone states are already confirmed as being in technical recession, including Netherlands, Italy, Portugal, Greece as well as Belgium.

China pledged to invest in European bailouts. Chinese Premier Wen Jiabao said at a joint press conference with EU President Van Rompuy that "China is ready to get more deeply involved in participating in solving the European debt issue." This is echoed by PBoC Governor Zhou Xiaochuan today as he said that "China will always adhere to the principle of holding assets of EU sovereign debt" and "would participate in resolving the euro debt crisis". This was seen as a commitment from China that at least it won't be cutting European bond holdings and would instead look for opportunities to invest more. More about China here China Hesitate to Act although It Reiterates to Support Eurozone.

Talking about China, PBoC cut bank reserve ratio by 50bps effective February 24, that is, from 21% to 20.5%. That's the second cut in two months after PBoC pushed the RRR to record 21.5% last June when CPI reached a three year high of 5.5% in May. CPI unexpectedly jumped to 4.5% yoy in January. But China seemed to be more worried by slowing global as well as domestic demand, which was reflected in the poor January trade data. The RR cut is seen as positive to the risk markets, by releasing as much as CNY 400b of liquidity, more than USD 60b.

From US, FOMC minutes for the January meeting released last week were as dovish as the policy statement suggested. Yet, the change in wordings suggested that there were fewer members demanding further easing. Policymakers noted that 'strains in global financial markets continued to pose significant downside risks to the economic outlook' and 'a few members' observed that elevated unemployment and subdued inflation pressure could 'warrant the initiation of additional securities purchases before long'. In December, it's stated that 'a number of members' judged additional purchases are warranted. In our opinion, QE3 remains possible for 2H12 despite recent improvements in economic indicators. More in FOMC Minutes Unveiled A Few Members Opted For More Asset Purchases.

The BOJ surprisingly expanded its asset purchase program by +10 trillion yen last week, sending the total fund size to around 65 trillion yen. At the same time, policymakers unanimously voted to keep the uncollateralized overnight call rate at 0.-0.1%. The unexpected move aimed to stimulate the country's economy which contracted an annualized -2.3% in 4Q11. Japanese yen will likely be little affected by the move. More in BOJ Surprisingly Adds Stimulus. Later in the week, BoJ Governor Shirakawa pledged that the bank would continue with "powerful monetary easing". Shirakawa described BoJ's framework as inflation targeting, similar to that of Fed. And at this point, he saw the inflation target of 1%, as the trigger to tighten up, a long way off, even though he thought Japan is moving towards and end to deflation. Note that Fed has already pledged to keep rates at historical low till 2014 and markets are expecting BoJ to follow.

Technical Highlights

Dollar index rebounded further to as high as 80.11 last week, the index lost momentum and dropped back sharply to close at 79.33. As noted before, 78.36 is seen as a short term bottom after drawing support from 38.2% retracement of 72.69 to 81.78 at 78.30. Price actions from there are viewed as corrective in nature. At this point, we're still favoring the case that whole rebound from 72.69 is finished at 81.78 on bearish divergence condition in daily MACD. So, that means, firstly, we'd continue to expect more corrective price actions above 78.36 in near term, and another rise could be seen. But upside is expected to be limited below 81.78 resistance. Eventually, we'd expect another fall through 78.36 after the consolidation from there completes.

Broad based weakness in the Japanese yen is expected to continue for a while. As noted during the week, AUD/JPY rise from 72.03 has resumed by taking out 82.37 resistance last week. Stronger rally is expected in near term to 100% projection of 72.03 to 83.94 from 74.77 at 86.68 next. However, the current rise is not decisively impulsive yet and it could turn out to be a leg inside the consolidation pattern from 88.05 only. Hence, we'd be cautious on reversal signal as AUD/JPY approaches 90.02 key resistance.

While DOW has taken out 2011 high, S&P 500 hasn't yet. And, we're indeed seeing loss of upside momentum with daily MACD staying below signal line even though S&P 500 managed to extend recent rise. We're still suspecting that the rise from 1074.77 is merely a leg inside the consolidation from from 1370.58. DOW's second leg was just a bit stronger while skewed the pattern upwards. Hence, focus will remain on reversal signal as S&P approaches 1370.58, and possibly further to 100% projection at 1376.55. Break of 1337.5 near term support will be an early sign of reversal. The unconvincing strength in commodity currencies is possibly a sign of losing momentum in risk markets. Hence, another rally in stocks might help boost AUD, NZD and CAD higher in near term but that would likely exhaust the move and the markets could reverse together. In that case, dollar would be lifted broadly which send the index back to above 80 and even 81 before staging another fall again.

The Week Ahead

Monday would be interesting even though US is on holiday. Initial focus will be on reaction to China's reserve requirement cut. Also, EU finance ministers are expected to finally approve Greece bailout. Economic calendar is relatively light. Though, PMIs from China and Eurozone would likely trigger some volatility in risk sentiments. RBA and BoE will release minutes but might trigger little reactions to markets only.

Monday: New Zealand PPI, Japan trade balance
Tuesday: RBA minutes; Swiss Trade balance; UK public sector net borrowing; Canada retail sales
Wednesday: HSBC China PMI manufacturing; Eurozone PMIs; BoE minutes; US existing home sales
Thursday: German Ifo; US jobless claims
Friday: Germany GDP; UK GDP; US new home sales

USD/JPY Weekly Outlook

USD/JPY soared sharply to as high as 79.60 last week and the break of 79.52 resistance indicates that whole rebound from 75.56 has resumed. Initial bias remains on the upside this week and current rise should target 61.8% retracement of 85.51 to 75.56 at 81.70 next. On the downside, below 78.98 minor support will turn bias neutral and bring consolidations first before staging another rise.

In the bigger picture, the case of long term reversal is starting to build up as USD/JPY is trading above the long term falling channel that started at 2007 high of 124.13. As noted before, bullish convergence condition is present in weekly MACD for some time already. Sustained trading above 79.52 should at least confirm that 75.65 is a medium term bottom. Further break of 85.51 will indicate reversal and target a test on 101.22 support turned resistance, which is close to 100 psychological level.

In the long term picture, the long term down trend in USD/JPY is still in progress. Such down trend is expected to extend further into uncharted territory with 70 psychological level as next target. In any case, we'd at least need to see sustained break of 85.51 before considering trend reversal.

USD/JPY 4 Hours Chart