Morning Forex Briefing

As we await the US Q4 GDP numbers this morning the USD is mixed to better and traders note that the Yen crosses have again been the focus overnight. USD/JPY has rallied overnight to post a high print at 117.57 where traders report sovereign offers around the 117.50 area capped the rally; stops are noted to be in play at 117.60 and 118.00. Strong offers are reported ahead of potential option defense at 118.50, more stops above which if triggered suggests an upside breakout of the bear-pennant formation. Low print in USD/JPY was 116.66 after a sharp sell-off was quickly bought back creating some hourly volatility but the new highs later in the session gave the overnight action up-trend near-term.

Heading into the end of the week the USD may rally as the “bad news” is out and GDP rarely is much different that estimates enough to surprise the markets. In my view, the USD/JPY is poised for a bout of short covering but I don’t think the long-term position of the USD is for strength. China’s PBOC set the Yuan rate at a new post-2005 high overnight and I think the general consistent upward pressure on Yuan will help keep the JPY underpinned into the next quarter. Should the USD rally into reported stops above the 118.00 area I would be a seller; I don’t see the rate much higher before moving lower.

In the other major pairs the USD is mixed, lower against GBP and steady against EURO. German industrial plant and equipment orders were up 27% from last year according to the VDMA; EURO getting a bit of lift on the news. ECB governors and spokesman were due to speak on various topics overnight and for the most part reiterated the commitment to curb inflation. Analysts point out the ECB is likely to hike rates 25 BP in Q2 and possibly once more in 2007 and some speculation that the EURO could rally to a new lifetime high is beginning to make the rounds. I would be a serious buyer of EURO on dips, 1.3250 may be the price we see should US data the next few days be USD friendly.

GBP continues to range trade but with a slightly negative tone. Although the BOE has been talking the GBP higher recently it appears the rate needs a correction before attacking highs for the year. The resiliency of the GBP/JPY cross is a strong indicator that the major pairs are all more bullish than bearish in my view and particularly GBP; although I think a try for the 2.00 handle will result in the end of the uptrend (?). Look for the USD to back and fill today. Strength is an opportunity to sell in my view, LONG USD positions should be covered back I think near-term.

EURO/USD Daily

Pair firm but lack of volume suggests no interest in the highs; correction lower is more likely than a rally and a break into support at fib defense between 1.3200 and 1.3250 areas a good place to buy in my view. 50% pullback possible and 100 bar will likely offer support too but I think the market is more aggressive than that; BUY dips for a test of the 2007 highs.

USD/JPY Daily

Rate reversing on moderate volume with good buying on dips, bear pennant formation still valid and potentially poised for upside rather than downside breakout. Stops triggered on the early break were in-range suggesting small money longs bailed overnight. Rally into upside stops expected to meet heavy offers above 118.00; look for short-covering rally to stall there and an excellent place to short.

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Jason
Jankovsky

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