BY Mario Sant Singh
Director of Training & Education
FXPRIMUS
Japanese Prime Minister Shinzo Abe’s nomination of Asian Development Bank (ADB) president Haruhiko Kuroda to become the next governor of the Bank of Japan (BOJ) has spurred forecasts for more aggressive easing to revive the world’s third-largest economy.
It is almost a foregone conclusion that Mr Kuroda will become the next BOJ head when incumbent Masaaki Shirakawa exits the job on 19th March. At a confirmation hearing during parliament in Tokyo, Mr Kuroda said that the BOJ will do “whatever is needed to end 15 years of deflation should he be confirmed as governor and indicated that open-ended asset purchases could start sooner than next year.”
The problem with deflation is that falling prices exacerbate real debt burdens. In Japan, consumer prices excluding fresh food fell 0.2 per cent in January. The price gauge hasn’t advanced 2 per cent - the central bank’s new target - for any year since 1997, when a national sales tax was increased.
Mr Kuroda has sent a clear message that further easing policies are needed, which will undoubtedly weaken the yen further. However, here’s the big question - if the yen is bound to weaken; why is it strengthening now?
The answer, lies in Italy.
Its recent election ended in a 4-way split, creating a political deadlock and edges the country to a new election. Last week, Italian 10-year bonds climbed to a three-month high, jumping 34 basis points to 4.79 per cent.
The uncertainties in Italy are permeating the market and adding to demand for the yen, a favourite destination amongst traders and investors during times of fear and panic. The current demand for the yen due to safe haven reasons is outweighing its weakness favoured by Mr Kuroda, causing the yen to gain amongst its peers.
To date, the yen has dropped 17 per cent in the past six months, the most among 10 developed market currencies measured by Bloomberg Correlation-Weighted Indexes. However, that slide looks to pause because of the uncertainties in Italy and Europe.
Another clue about the current “risk-off” sentiment can be found in the futures market.
According to data from the Washington-based Commodity Futures Trading Commission, traders are betting that the euro will weaken against the dollar, reversing to a net-short position of 9,394 contracts as of 26th Feb. The week before, large speculators held a net-long position of 19,103 contracts.
Top News This Week
USA: Non-Farm Payrolls. Friday, 8th March, 9.30pm.
I expect figures to come in below 150K, (previous figure was 157K).
Trade Call
Short EUR/USD at 1.2995
On the hourly chart, EUR/USD is moving in a strong downtrend. Traders are focused on fresh news regarding the political stalemate in Italy. This will create a short bias and I expect further downside for EUR/USD this coming week.
An entry is taken just below the psychological level of 1.300. We will go short at 1.2995 and a stop loss of 55 pips is placed above the previous high. We will have two targets on this trade, exiting the first position at 1.2940 and the second position at 1.2885.
Entry Price = 1.2995
Stop Loss = 1.3050
1st Profit = 1.2940
2nd Profit = 1.2885
