Forex: Japanese Yen Leads and Threatens Reversals Across All Majors

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By Christopher Vecchio, DailyFX Currency Analyst

ASIA/EUROPE FOREX NEWS WRAP

FX markets are mixed but risk-aversion is increasingly prevalent as trade has continued through the morning on Friday, just ahead of the critical advance third quarter US Gross Domestic Product print at 08:30 EDT / 12:30 GMT. Leading the decline is the Euro, damaged by the Spanish Unemployment Rate ticking above 25% (!) in the third quarter, which has in turn dampened demand for Spanish bonds. As I've previously shown, the EURUSD and the Spanish 2-year bond yield have a highly significant correlation.

But the big news is that the Japanese Yen is the top performer on the day after an absolutely abysmal first few weeks in October. In fact, the Yen is working on a number of significant reversals against most of the majors:

USDJPY: Bearish Outside Day (key reversal) on daily close < 79.75/80
AUDJPY: Bearish Piercing on daily close < 82.50/55
EURJPY: Bearish Piercing on daily close < 103.40/45
GBPJPY: Bearish Inside Day

If these patterns are fulfilled, my bias towards high beta currencies and risk-correlated assets will be negative for the last week of October. However, as I explain in the S&P 500 technical analysis commentary at the bottom of this report, the broadest measure of risk-appetite is sitting at very crucial support at the time this report was written. Accordingly, a move higher by risk (weaker Yen) can't be dismissed despite the pending bearish FX signals. Today's closing levels are very important.

Taking a look at credit, peripheral yields are rising, underpinning Euro weakness on the day. The Italian 2-year note yield has increased to 2.286% (+5.1-bps) while the Spanish 2-year note yield has increased to 3.114% (11.4-bps). Similarly, the Italian 10-year note yield has increased to 4.906% (+5.7-bps) while the Spanish 10-year note yield has increased to 5.618% (+5.0-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:50 GMT

JPY: +0.64%

NZD:+0.07%

GBP:-0.11%

CAD:-0.21%

AUD:-0.23%

CHF:-0.31%

EUR: -0.32%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.01% (+0.23% past 5-days)

ECONOMIC CALENDAR

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

TECHNICAL OUTLOOK

EURUSD:

Global risk-aversion has stoked US Dollar demand and the pair reversed hard late yesterday, breaking through significant support, 1.2940/50 (ascending trendline off of July 24 and August 2 lows). The Indeed, the brief trip back above 1.3000 may have been the bounce that I was looking for. We're neutral here, though with the October 1 low still holding, our bias is to buy dips the remainder of the month. Resistance comes in at 1.2960, 1.3020/25, 1.3080, 1.3135/45 (October high), and 1.3165/75 (September high). Support comes in at 1.2820/45 (50-EMA, 200-DMA, mid-October swing low, monthly pivot) and 1.2800/05 (October low).

USDJPY:

A daily key reversal (in an uptrend: setting a new high before closing below the prior day's low) is in the works at a high, with the daily RSI coming out of overbought territory. A close below 79.75/80 would confirm the sell signal; this could be the move lower to look for a better entry price to get long. As such, we're looking to buy the USDJPY on dips for a move towards resistance at 80.60/65 (June highs). Resistance is at 80.35/40 (October high) and 80.60/65. Support is 79.75/80, 79.45/50 (200-DMA), and 79.20.

GBPUSD:

Yesterday I wrote: "The GBPUSD has hit descending channel resistance today after bouncing at channel support at 1.5910 on Tuesday." The topside resistance held, and if the range is going to hold, then we're biased lower towards 1.5900. A daily close above 1.6125/45 (weekly high, descending channel resistance) would setup for a move towards 1.6300. Resistance comes in there, 1.6170/80 (last week's highs), 1.6260 (the former April swing highs by close), and 1.6300. Support is 1.6025 and 1.5900/10 (October low, descending channel support).

AUDUSD:

An Inverted Hammer yesterday has led to more downside today, and has consolidated amongst a confluence of moving averages at 1.0310/45 (20-EMA, 50-EMA, 100-DMA, 200-DMA). Resistance is at 1.0405/25 (former swing highs and lows, October high) and 1.0500/15. Support comes in at 1.0310/45, 1.0265/75 (ascending trendline off of October 8 and October 23 lows), 1.0230/35, and 1.0200/15.

SPX500:

Nothing has changed: "A short-term top is potentially in place after support at 1420/25 (the 61.8% Fibo retracement on June 2012 low to September 2012 high, ascending trendline off of the June 4 and July 24 lows) broke yesterday following tests on three occasions the past two weeks." Targets near 1355 would come into focus if price breaks below the monthly S1 at 1399. Support comes in at 1396/1400 (100-DMA), 1378 (200-DMA), and 1355 (monthly S2, ascending channel support off of November 2011 and June 2012 lows). Resistance comes in at 1429/32 (20-EMA), 1460, 1470, and 1498/1504.

GOLD:

No change: "Gold continues to hold below 1715 (mid-September swing low) but above 1700...my bias is back to neutral and looking higher. I still expect the 1700 area to be defended vigorously, and look to get long as low as 1680. Resistance is 1715, 1735, 1755/58 and 1785/1805. Support is 1700, 1680, and 1660/65 (100-DMA, 200-DMA)."

--- Written by Christopher Vecchio, DailyFX Currency Analyst

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