The USD remained under pressure overnight, as did the JPY, as traders continued their “risk on” trading mentality.
In Japan, the new Prime Minister, Shinzo Abe, released his JPY 10.3 trillion fiscal stimulus plan that is aimed at aiding Japan’s economic recovery as well as ending inflation. The plan is expected to boost GDP by 2% and to create 600,000 jobs. According to Abe, “we need to say good-bye to the shrinking economy and aim to achieve a strong economy where innovation and new demand lead to more jobs and income.”
According to the plan, JPY 3.8 trillion will be earmarked for disaster prevention and reconstruction, while JPY 3.1 trillion will be used to hopefully stimulate private investment. In order to finance this package, an extra budget of JPY 13.1 trillion will be needed and this will hopefully be passed next week. There is continued speculation that the Bank of Japan will increase it’s inflation target to 2% when it meets next week on January 21-22, which is what PM Abe has requested.
Traders are looking at all of this activity in Japan and with the expected passing of the stimulus plan, they have aggressively sold JPY. The USD/JPY reached at high of 89.36 overnight, before profit taking saw the currency pair fall back below the 89.00 level. There is no doubt that traders are targeting a 90.00 USD/JPY, sooner rather than later and we could see that level reached ahead of the BOJ meeting. Resistance at the present time is at 89.40, with strong support at 88.50 and 88.25.
Adding to the “risk on” trading the EUR is enjoying post ECB meeting strength as traders have responded very positively, not only to the ECB leaving rates unchanged, but to the fact that after disagreements by the voting members in December, when as many as 3 members were in favor of lowering rates, this time around, all member voted unanimously to keeping rates unchanged. While most observers expected the refinancing rate to remain at 0.75%, there was concern that the deposit rate which remains at 0%, would be lowered into negative territory. President Draghi did say he expected economic weakness to continue in 2013, but also expected a gradual recovery later in 2013. So it will now be up to the economic numbers going forward to maintain the EUR strength.
Technically, resistance at the present time and the near term target is at 1.3310. A break there sets in motion the longer term target of 1.3485. Support near term is at 1.3250 and 1.3220.
When traders take on risk, the AUD and the CAD usually benefit, and this time is no exception. The AUD has made a run at the 1.0600 level, before settling back in the upper 1.05 region, while the USD/CAD has tested support at .9820.
As for today, there is nothing on the horizon that should change traders’ minds as we finish the first full trading week of 2013. Expect the EUR to remain “better bid”, with a run towards 1.3300 not out of the question.
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