Daily Pivots: (S1) 113.90; (P) 114.67; (R1) 115.22; More...

Intraday bias in USD/JPY remain son the downside for the moment. Correction from 118.65 short term top is expected to extend lower to 38.2% retracement of 98.97 to 118.65 at 111.13. At this point, we'd expect strong support from there to contain downside and bring rebound. Above 116.86 minor resistance will turn bias to the upside for 118.65 high. However, sustained break of 111.13 will argue that whole rise from 98.97 has completed and bring deeper fall to 61.8% retracement at 106.48 and below.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

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Daily Pivots: (S1) 0.7461; (P) 0.7485; (R1) 0.7521; More...

With 0.7351 minor support intact, the rebound from 0.7158 would extend through 61.8% retracement of 0.7777 to 0.7518 at 0.7541. At this point, we'd expect strong resistance from 0.7777/7833 to limit upside. On the downside, below 0.7351 minor support will turn bias back to the downside for 0.7144 key support level.

In the bigger picture, AUD/USD is staying inside long term falling channel and it's likely that the down trend from 1.1079 is still in progress. Break of 0.6826 low will confirm this bearish case. We'll be looking for bottoming sign again as it approaches 0.6008 key support level. Meanwhile, sustained break of 0.7833 resistance will be a strong sign of medium term reversal.

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Daily Pivots: (S1) 1.3092; (P) 1.3129; (R1) 1.3151; More...

Deeper decline is expected in USD/CAD as long as 1.3293 resistance holds. As noted before, prior break of 1.3080 key support level could have completed a double top pattern (1.3588, 1.3598) and indicates reversal. That is, whole corrective rise from 1.2460 is finished. Deeper decline should be seen to retest 1.2460 low. However, break of 1.3293 will invalidate this bearish case and turn bias to the upside for retesting 1.3598.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. The second leg is likely finished at 1.3598 too after hitting 50% retracement of 1.4689 to 1.2460 at 1.3575. Break of 1.3080 would now likely resume the fall from 1.4689 through 1.2460 to 50% retracement of 0.9406 to 1.4689 at 1.2048. We'd start to look for reversal signal below 1.2460 again to complete the correction. In case of another rise, we'll look for topping sign at 61.8% retracement of 1.4689 to 1.2460 at 1.3838.

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Daily Pivots: (S1) 0.8686; (P) 0.8726; (R1) 0.8760; More...

EUR/GBP's rebound form 0.8303 extends today and intraday bias stays on the upside for 61.8% retracement of 0.9304 to 0.8303 at 0.8922 and above. Such rebound is seen as the second leg of the consolidation pattern from 0.9304. Hence, we'll be cautious on topping above 0.8922. On the downside, though, break of 0.8646 minor support is needed to indicate completion of the rise. Otherwise, near term outlook will stay cautiously bullish in case of retreat.

In the bigger picture, price actions from 0.9304 are viewed as a medium term corrective pattern. Deeper fall cannot be ruled out yet. But we'd expect strong support around 55 weeks EMA (now at 0.8260) to contain downside. Overall, the corrective pattern would take some time to complete before long term up trend resumes at a later stage. Break of 0.9304 will pave the way to 0.9799 (2008 high).

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Daily Pivots: (S1) 1.4132; (P) 1.4192; (R1) 1.4244; More...

EUR/AUD lost downside momentum ahead of 1.4072 low and intraday bias is turned neutral first. At this point, there is no clear indication of resumption of larger decline yet. Above 1.4332 support turned resistance will turn bias back to the upside to extend recent sideway trading. Nonetheless, decisive break of 1.4072 low will extend the correction from 1.6587 towards next key support level 1.3671.

In the bigger picture, price actions from 1.6587 medium term top are viewed as a consolidative pattern. 50% retracement of 1.1602 to 1.6587 at 1.4095 was already met. While further fall cannot be ruled out, we'd expect strong support above 1.3671 to contain downside and bring rebound. Up trend from 1.1602 should not be finished and will resume later. Break of 1.4880 resistance will be the first sign of resumption of up trend from 1.1602 and target retesting of 1.6587 resistance first.

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Daily Pivots: (S1) 1.0720; (P) 1.0730; (R1) 1.0744; More...

Intraday bias in EUR/CHF remains neutral for the moment as it's bounded in range of 1.0677/0762. Below 1.0677 will extend the corrective fall from 1.1198 and target 1.0620 key support level. On the upside, above 1.0762 will turn focus back to 1.0897 resistance. Decisive break there will suggest reversal and turn near term outlook bullish.

In the bigger picture, the decline from 1.1198 is seen as a corrective move. Such correction is still in progress and retest of 38.2% retracement of 0.9771 to 1.1198 at 1.0653 could be seen. Sustained trading below 1.0653 will target 50% retracement at 1.0485. Meanwhile, break of 1.0897 resistance will argue that the larger up trend is finally resuming for above 1.1198.

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Daily Pivots: (S1) 121.45; (P) 121.93; (R1) 122.27; More...

EUR/JPY's fall continues today and the break of 120.90 support indicates near term reversal. That is, the corrective rebound from 109.20 is likely completed at 124.08, ahead of 126.09 key resistance. Intraday bias is now on the downside for 118.45 cluster support (38.2% retracement of 109.20 to 124.08 at 118.39). Sustained break there will target 61.8% retracement at 114.88 and below. On the upside, above 122.41 resistance is needed to indicate completion of the decline. Otherwise, outlook will now stay bearish in case of recovery.

In the bigger picture, price actions from 109.20 medium term bottom are seen as part of a medium term corrective pattern from 149.76. There is prospect of another rise towards 126.09 key resistance level before completion. But even in that case, we'd expect strong resistance between 126.09 and 141.04 to limit upside, at least on first attempt. Sustained trading below 55 day EMA will pave the way to retest 109.20.

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The British Pound drops across the board as the week starts. It's reported that prime minister Theresa May is schedule to deliver a speech on Tuesday to lay out the plan of Brexit. And, May is expected to outline a "hard Brexit" approach. And UK is prepared to withdraw from tariff-free trade relationship with EU, in return for the control of immigration. GBP/USD drops through 1.2036 support and breaches 1.2 handle as recent decline resumes. EUR/GBP also extended recent rebound from 0.8303 and reaches as high as 0.8844. GBP/JPY also drops sharply to as low as 136.94 so far. Sterling's selloff slowed a bit on news that Treasury is going to talk to major banks to smooth market reactions. But the pound remains vulnerable to further decline.

Meanwhile, Dollar recovers mildly today as focus turns to president-elect Donald Trump's inauguration on Friday, January 20. While this would mostly be a ceremonial occasion, Trump could make use of the occasion to outline his priorities and policies on taxes, trade and immigration. The market would also closely watch for comments and announcement from his administration, on issues regarding trades and legislation, in following days. Besides, Fed Chair Janet Yellen will speak on Wednesday and Thursday this week, she might acknowledge the recent solid improvement in job and inflation data.

As for today, UK Rightmove house price index rose 0.4% mom in January. Japan machine orders dropped -5.1% mom in November. Machine tool orders rose 4.4% yoy in December. Domestic CGPI rose 0.6% mom in December. Tertiary industry index rose 0.2% mom in November. Australia TD securities inflation rose 0.5% mom in December. US markets are on holiday today.

Looking ahead, BoC and ECB will meet this week and would likely be non-event. Indeed, ECB just announced to extend the QE until December 2017, but lower the pace to EUR 60b per month from April 2017. There will be a number of key data from UK this week, including CPI and employment. Fed will release Beige Book economic report. Aussie traders will look into employment data and a string of data from China on Friday. Here are some highlights:

• Tuesday: Australia home loans; UK CPI, PPI; German ZEW; US Empire state manufacturing
• Wednesday: German CPI final; UK job; Eurozone CPI final; US CPI, industrial production, NAHB housing index; Fed's Beige Book; BoC rate decision.
• Thursday: Australia employment; Swiss PPI; ECB rate decision; Canada manufacturing sales; US housing starts, Philly Fed survey, jobless claims
• Friday: China GDP; industrial production; fixed asset investment, retail sales; German PPI; UK retail sales; Canada CPI, retail sales

GBP/JPY Daily Outlook

Daily Pivots: (S1) 138.89; (P) 139.73; (R1) 140.39; More...

GBP/JPY's decline from 148.20 accelerated by breaking the channel line decisively. 38.2% retracement of 122.36 to 148.42 at 138.46 was also taken out firmly. The development suggests that whole corrective rise from 122.36 has completed at 148.42. Intraday bias stays on the downside for 61.8% retracement at 132.31 and below. On the upside, break of 142.16 support turned resistance is needed to indicate completion of such decline. Otherwise, outlook will stay bearish in case of recovery.

In the bigger picture, price actions from 122.36 medium term bottom are seen as developing into a corrective pattern. Upside is so far limited by 38.2% retracement of 195.86 to 122.36 at 150.4 for setting the medium term range. At this point, we don't expect a break of 122.36 in near term and the corrective pattern would extend for a while.

Economic Indicators Update

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Daily Pivots: (S1) 138.89; (P) 139.73; (R1) 140.39; More...

GBP/JPY's decline from 148.20 accelerated by breaking the channel line decisively. 38.2% retracement of 122.36 to 148.42 at 138.46 was also taken out firmly. The development suggests that whole corrective rise from 122.36 has completed at 148.42. Intraday bias stays on the downside for 61.8% retracement at 132.31 and below. On the upside, break of 142.16 support turned resistance is needed to indicate completion of such decline. Otherwise, outlook will stay bearish in case of recovery.

In the bigger picture, price actions from 122.36 medium term bottom are seen as developing into a corrective pattern. Upside is so far limited by 38.2% retracement of 195.86 to 122.36 at 150.4 for setting the medium term range. At this point, we don't expect a break of 122.36 in near term and the corrective pattern would extend for a while.

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Recent correction does not change our relatively positive outlook over USDJPY this year. Donald Trump's victory at the US presidential election last November triggered sharp rally in interest rates and USD, facilitated by unwinding of USD shorts and opening of USD longs. Despite a pullback after soaring to a recent high 118.66 in mid-December, reflation trades, hinging on the bets that Trump's administration would drive quicker growth and inflation, remain in play and should push USDJPY higher after consolidation. Yield curve targeting announced in September indicates that BOJ would strive to keep the 10-year JGB yields close to its target by buying sufficient amounts of bonds. This, together with the sharp rise in US yields, helps accelerate divergence of Japanese yields from those in the US, pressuring Japanese yen. We do not feel surprised if prices corrects to 110-112 in 1Q17. Rather, it offers a buying opportunity for a resumption of recent rally. Risk to USDJPY's strength is slower-than-expected and/or milder-than-expected implementation of Trump's pro-growth policy.

BOJ's Shift to Yield Curve Control. In September, BOJ announced a policy called “QQE with Yield Curve Control”, effectively shifting its monetary stimulus from money supply expansion to interest rate control. As mentioned in the accompanying statement, the new policy framework consists of two major components, namely, 'yield curve control' in which the Bank will control short-term and long-term interest rates, and 'inflation-overshooting commitment' in which the Bank commits itself to expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI) exceeds the price stability target of 2% and stays above the target in a stable manner. For “yield curve control”, BOJ noted that it would purchase JGBs so that 10-year JGB yields would remain around 0%. The purchases would be conducted more or less in line with the current pace, an annual pace of increase in the amount outstanding of its JGB holdings at about 80 trillion yen. BOJ also noted that JGBs with a wide range of maturities would continue to be eligible for purchase, while the guideline for average remaining maturity of the Bank's JGB purchases will be abolished. For short term rate, BOJ would apply a -0.1% rate to the Policy-Rate Balances in current accounts held by financial institutions at BOJ. In a nutshell, BOJ would strive keep its 10-year government bond yield at 0%, in contrast with usual central bank practice of controlling only short-term rates.

The chart below shows that USDJPY has been highly correlated with US-Japan 10-year yield spreads, over the past months. Hopes that Trump's pro-growth policy would drive higher economic expansion and inflation, and facilitate a tighter monetary policy stance, have lifted Treasury yields and USD of late. With the market shy of pricing in three Fed funds rate hikes (as signaled in the December dot plot) this year, there is room for USD to rally further should incoming macroeconomic data eventually convince traders that more rate hikes are possible. Fed's hawkish and BOJ's determination to keep long-term yields near 0% reveal monetary policy divergence and help widening yield differential, a factor facilitating the rise of USDJPY

Oil Price and Inflation Outlook:

Energy price contributes to about 7% of US headline inflation. Yet, the correlation of the two can be as higher as 0.96, say, in October. The synchronized decline in USDJPY and crude oil prices over the past weeks is not coincidental, but driven by diminished inflation expectations amidst falling oil prices. If crude oil prices manage to extend gains as driven by tightening of global demand/supply fundamentals this year, inflation expectations, and therefore yields, should climb higher, and vice versa.

Japan's inflation expectations have remained subdued. BOJ's December survey shows that only 64.7% of the respondents forecast consumer price to rising this year. This marks a drop from 65.1 in the previous quarter and the lowest since 4Q12. As noted in the December monetary statement, BOJ acknowledged that the year-on-year CPI (CPI, all items less fresh food) has been “slightly negative” and that “inflation expectations have remained in a weakening phase”. The central bank continued to expect inflation to increase towards its 2% target eventually. While BOJ upgraded its economic assessment, the Cabinet Office released the upgraded estimates in December. It now expects real GDP to grow +1.5% in the next fiscal year starting April 1, up from +1.2% previously. Inflation would was revised lower to +1.1% from +1.4% previously. The Cabinet Office also unveiled that the government's initial budget for next year would increase to 97.5 trillion yen. Weakness in Japanese yen would raise import price while higher oil price might help lift inflation, we expect to stay far below BOJ's +2% target. This suggests that BOJ would at least maintain the existing stimulus measures, i.e. keeping interest rates, both long term and short term, at exceptionally low levels.