“Currency Wars” can be placed on the shelf alongside

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The foreign exchange markets come back to full capacity today as traders in the US return from a three day holiday. And they return to a market that has seen the Japanese Yen initially weaken after the G20 summit stated over the weekend that Japan can basically do what it wants with its currency without any sanctions, so now the term “currency wars” can be placed on the shelf alongside of “fiscal cliff”. There will be no currency war.

After reaching a high into the low 94 region following the G20 meeting, the USD/JPY has consolidated a bit, trading in the mid 93 region for most of the last 24 hours. Most traders expect a renewed push higher in the coming weeks and that this is just a pause ahead of further JPY weakening.

The BOJ minutes from the January meeting were released and were mixed comments about the possibility of Japan purchasing foreign bonds. While Japanese Finance Minister Aso said there was no plan for foreign bond purchases, PM Abe said that idea of buting foreign bonds exists. The markets are now focused on who the choice for Bank of Japan governor will be. The leading candidate remains Toshiro Muto, who seems to have taken the lead over Haruhiko Kuroda and Kazumasa Iwata. Accodring to PM Abe, the next governor will be one who reflects the governments determination to beat inflation.

The USD/JPY is supported at 93.25 on the downside followed by 93.00. The resistance levels begin at 93.80, followed by 94.10. While traders still expect a weaker JPY going forward, this consolidation period is expected to last a few more trading sessions.

More: USDJPY forecast.

The EUR remained in a tight trading range overnight, getting comfortable with a 1.33 handle. In a speech to the European Parliament yesterday, ECB President Draghi spoke of the “competitive depreciation” of foreign exchange rates. He also commented that most of the recent “exchange rate moves, were the result of domestic macro-economic policies meant to boost the respective economies”. We have already seen this in the US, Japan and the UK. Most traders believe it is only a matter of time until the Eurozone adopts some form of quantitative easing. As for the economy, Draghi once again said the forecast was for economic weakness in the early part of 2013, but that he expected a gradual recovery later in the year. The German ZEW number will be released later this morning and is expected to show improvement in economic sentiment.

The EUR remains supported at the 1.3330 level, followed by support at 1.3310. Resistance remains at 1.3375 and 1.3400.

After strongly weakening over the last few trading session, the CAD has had a very quiet overnight trading range, briefly dipping below the 1.0100 level but for most of the overnight, trading in the 1.0110 – 1.0125 range. There are a number of Canadian economic statistics due out today including Portfolio Investment figures and Wholesale Sales. Crude oil seems to have found a base so this should stabilize the CAD as well.

Technically, USD/CAD shows resistance at the 1.0130 level, followed by 1.0160. Support remains at 1.0095 and 1.0060.

As the North American market returns in force this morning, look for traders to probe the downside on the EUR and CAD. I would expect that traders will not stubborn in their convictions at present, so a failure moving one way, should see a quick reversal the other way.

Further reading: FX more sensitive to data

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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