Dollar Boosted by CPI, Yen’s Fall Continues Despite BoJ Hike

Dollar is boosted high in early US session on higher than expectation consumer inflation data. Headline CPI rose 0.2% mom, 2.1% in Jan, above expectation of 0.1%, 1.9%. Core CPI rose 0.3% mom, 2.7% yoy, also beating expectation of 0.2%, 2.6%. More importantly, Core CPI has been slowing from last Sep’s 2.9% to 2.6% in Nov and stayed there in Dec. Jan’s acceleration to 2.7% could be an indication that core inflation’s down trend has bottomed out at 2.6%, which is still far above Fed’s comfort zone. That may force Fed to ‘restart’ the tightening cycle if core inflation continues to fail to moderate further.

Conference Board Leading indicator and FOMC minutes will be featured next. The overall view of Fed on inflation and growth should be presented by Bernanke in last week’s testimony already and hence we don’t expect much new information in today’s FOMC minutes. However, it will be interesting to note how the FOMC members differs in their view as Bernanke did sound much more neutral comparing to some other members.

The Japanese yen weakens further against Euro and Dollar after BoJ’s decision to raise rates by 0.25% to 0.5%. It’s a typical buy on rumors, sell on news case. Though the hike surprised part of the markets today, it’s generally believed that the pace of BoJ’s tightening will still be slow. That is assured by the accompanying statement that it will “adjust the level of interest rates gradually in the light of developments in economic activity and prices, while maintaining the accommodative financial conditions ensuing from very low interest rates for some time.” Fukui confirmed that again in his conference. Basically, yen won’t be closing the rate gap with other major currencies. Also, Fukui said that even though carry trades is one consideration, it’s not all, and unwinding of excessive market positions could hurt economy. The pushed the yen further lower with EUR/JPY now pressing record high again.

BoE minutes revealed that the decision to hold rate steady at 5.25% earlier this month was done by a margin of 7 to 2 vote, which was inline with consensus expectation. Tim Sentance and Andrew Besley voted in favor of an immediate rate hike. The arguments in favor of a rise included the upswing in near-term inflation expectations, rising producer price growth, as well as money supply and asset price growth. However, a majority of the voters believed that there was time for wait-and-see. The minutes also emphasized the downside risks to inflation due to volatility in energy prices. Together with the information from last week’s inflation data and BoE inflation report, it’s believed that even though another hike is still needed to bring down inflation to below BoE’s target rate of 2%, the MPC will continue the wait-and-see attitude and the timing will very much depend on the upcoming data. Sterling continues to trade with an undertone against dollar in tight range.


Daily Pivots: (S1) 119.59; (P) 119.95; (R1) 120.37;


USD/JPY’s rally from 118.97 extends further to above 121 level as expected. At this point, intraday bias remains on the upside as long as USD/JPY stays above 120.76 minor support. As discussed before, corrective fall from 122.17 is treated as consolidation to rally from 114.41 only and should have completed with three waves down to 118.97. Hence, further rise is expected to follow to retest this 122.17 high. On the downside, below 120.76 will turn intraday outlook consolidative first but downside should be contained above 120.18 support and bring rally resumption.

In the bigger picture, with medium term up trend from 108.99 remains in force, favor is still on the case that rise from 108.99 represents resumption of long term up trend from 101.66. The preferred interpretation of the rise from 108.99 is that the first move has completed at 117.87. Subsequent price actions to 113.95, 119.86 and 114.41 is treated as interim consolidation that’s skewed upward by the rise to 119.86. Rise from 114.41 is treated as resumption of the whole up trend. With this interpretation, next upside target will be 100% projection of 108.99 to 117.87 from 114.41 at 123.29.

However, decisive break of 117.96 support will rise some doubt about this interpretation In such case, a deeper decline should follow to retest medium term rising channel (now at 116.67) first. A break of this channel will swing favors back to the case that another medium term decline should be seen towards 108.99 low before completing the whole long term consolidation that started at 121.38.

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