Yen Down Further as US Yields Surged, Dollar Mixed

Yen is under some persistent selling pressure since yesterday, following rebound in US benchmark yields. Aussie and Canadian Dollars are the stronger ones on commodity and oil prices, but Kiwi is lagging far behind. Euro is the stronger European majors while Sterling and Swiss Franc are on the softer side. Dollar is mixed for now and struggles to find a clear-cut direction.

Technically, Gold edged higher to 1833.42 but upside momentum has been very unconvincing, as seen in bearish divergence condition in 4 hour MACD. Immediate focus is now on 61.8% projection of 1616.51 to 1786.83 fro 1728.48 at 1833.73. Decisive break there should prompt upside acceleration towards 100% projection at 1898.80 next. However, break of 1784.42 will suggest rejection by 1833.73, and bring deeper pull back towards 1728.48 support. Gold’s next move would be a signal to confirm Dollar’s.

In Asia, at the time of writing, Nikkei is down -0.54%. Hong Kong HSI is up 1.52%. China Shanghai SSE is down -0.25%. Singapore Strait Times is down -0.04%. Japan 10-year JGB yield is down -0.0077 at 0.461. Overnight, DOW rose 0.11%. S&P 500 dropped -0.40%. NASDAQ dropped -1.38%. 10-year yield rose 0.109 to 3.860.

BoJ Opinions: Expansion of 10-yr yield fluctuations enhances sustainability of YCC

In the Summary of Opinions at BoJ’s December 19-20 meeting, several members noted that Japan is currently in a “critical phase” in achieving 2% inflation target. One noted that “signs of a virtuous cycle have started to be seen” between wages and prices”. This is “evidenced by the overall high levels of corporate profits and moves to increase wages amid tight labor market conditions.”

But “price stability is not considered to have been achieved”. Thus, it’s appropriate for BoJ to continue with the Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control for as long as necessary, to “firmly support the economy and realize a favorable environment for firms to raise wages.

Many members noted the “deterioration in the functioning of bond markets”, and “distortion in the price formation of 10-year bonds”. Expansion of the range of 10-year JGB yield fluctuation will address the deterioration and distortion. But it’s “not intended to change the direction of monetary easing”. The expansion will “contribute to enhancing the sustainability of yield curve control”.

Japan industrial production down -0.1% mom in Nov, output weakening

Japan industrial production declined -0.1% mom in November, better than expectation of -0.2% mom. But that’s still the third straight month of contraction, followed -3.2% mom in October and -1.7% mom in September.

Looking at some details, general machinery output was down -7.9%, production machinery was down -5.7% while auto products was down -0.8%.

The Ministry of Economy, Trade and Industry downgraded the assessment of industrial production to “weakening”. It expects output to rebound by 2.8% in December, then decrease -0.6% in January.

US 10-year yield rebounds with USD/JPY

US 10-year yield rose notably overnight, ending up 0.109 at 3.860. The rally was believed to be triggered by news that China is further exiting pandemic restrictions and travel controls. The move was seen, on the one hand, as a boost to the global economy. On the other hand, Japan, India, Italy and South Korea all said they would be imposing tighter COVID-testing requirements on tourists from China, with concerns on the lack of transparency on infections and variants in the country.

Anyways, 10-year yield’s break of 3.798 resistance argues that the slightly deeper than expected corrective fall from 4.333 has completed at 3.402. The range of the corrective pattern should be set between 3.4/4.3. Further rally is now in favor for the near term. But break of 4.333 is not envisaged until further developments.

USD/JPY’s break of 133.61 support should confirm short term bottoming at 130.55, on bullish convergence condition in 4 hour MACD. With a little help from the rebound in yields, USD/JPY would rise further towards 38.2% retracement of 151.93 to 130.55 at 138.71.

Looking ahead

Swiss Credit Suisse economic expectations and US pending home sales will be released today.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 141.34; (P) 141.80; (R1) 142.47; More….

A short term bottom should be formed in EUR/JPY at 138.79 with current rebound. Intraday bias is back on the upside for 55 day EMA (now at 143.37). Sustained break there will argue that whole correction from 148.38 has completed with three waves down to 138.79. Further rise should then be seen back to 146.71/148.38 resistance zone. On the downside, below 141.12 will bring retest of 138.79 instead.

In the bigger picture, as long as 55 week EMA (now at 138.54) holds, larger up trend from 114.42 (2020 low) is still in progress for 149.76 long term resistance. However, firm break of 55 week EMA will bring deeper fall to 38.2% retracement of 114.42 to 148.38 at 135.40 before completing the correction from 148.38.

Economic Indicators Update