The Japanese Finance Minister may have caught a cold as the US economic sneeze persists but the Japanese yen preserves strength across the board in Monday Asian/European trade. The 3.3% contraction in Q4 GDP and reports of a possible resignation of Japan's finance minister Nakagawa have put up little resistance to safe haven bids in the low yielding currency after the G7 statement on foreign exchange markets omitted the issue of yen strength. As the G7 shifted its focus from individual currencies to combating the global economic crisis, foreign exchange traders maintained their focus on bidding up the yen ahead of further clarity on the passing of the $787 billion stimulus package.

The chart below shows the number of contracts of yen longs relative to USD shorts at the Chicago Mercantile Exchange slipped last week to a net 43,597 contracts, down from 50,518 contracts the prior week. Considering that the figures stand below the all time high of 65,920 reached in April 2008, the yen's current strength is partly underlined by lack of Japanese appetite into foreign stocks and bonds following the destruction of capital wealth of the past 2 years. The other key component supporting the Japanese currency is the anticipated rate cuts in the UK and Eurozone, as well as prolonged zero rates in the US. This well be highlighted in Wednesday's release of the minutes from the latest interest rate decisions of the Fed and the Bank of England.


USDJPY enters its first 3-day winning streak since the first week of January and is slated to close above the important 91.90 resistance in the event that markets show confidence in the just passed US stimulus package. Prolonged gains are seen encountering the next obstacle at 92.35, followed by 92.95 - 76.4% retracement of the decline from 94.7 to 87.19. Preliminary foundation stands at the TL support of 91.30, followed by 90.80.

Fresh Sterling Weakness?

Sterling weakness could return as soon as tomorrow on the release of the UK Jan CPI (Tues), minutes of this month's BoE rate decision (Wed), CBI survey (Wed) and Jan retail sales (Fri). Jan CPI could fall to as low as 2.7% y/y from 1.1%, while the core rate is seen as low as 1.0% from 1.1%, which would be in line with the latest inflation report's outlook for rising disinflationary risks. Friday's release of the Jan retail sales are expected to show a smaller rise of 2.1% after the holiday sales fuelled-increase of 4.0% in December. But the possibility of a greater than expected increase figure is also plausible on prolonged holiday discounting --as was the case in last week's release of the 1.0% jump in US January retail sales.

The aforementioned dynamics coupled with negative moving average crossovers are likely to push GBPUSD below the $1.4240s and onto $1.41. The fact that there were no remarks about the GBP at the G7 meeting may remove any intermediate support for the currency until as the emergence of the $1.40 figure. The likelihood of another run-up in the pound will require a fresh boost of risk appetite once US markets return from the long weekend. $1.4640 stands as major resistance.

Ashraf Laidi