BOJ Underwhelm, ECB Up Next

KEY DATA RELEASES TODAY (GMT) :

0930 GBP Average Earnings Index 3m/y exp 1.7% v 1.4%
0930 GBP Unemployment Rate exp 5.9% v 6.0%
0930 GBP Claimant Count Change exp -24.2K v-26.9K
0930 GBP MPC Official Bank Rate Votes exp 2-0-7 v 2-0-7
0930 GBP MPC Asset Purchase Facility Votes exp 0-0-9 v 0-0-9
1330 USD Housing Starts exp 1.04M v 1.03M
1330 USD Building Permits exp 1.06M v 1.04M
1500 CAD BOC Rate Decision exp 1% v 1%

OVERNIGHT:

USD/JPY fell 130 pips to print a low of 117.56 after the BOJ maintained its key policy stance of ¥80T annual monetary base increase (only 1 out of 9 voted to change the stimulus), while also extending its low-rate funding scheme by a year and boosting provision to each institution from ¥1T to ¥2T. Moreover, BOJ maintained its overall economic assessment but upgraded its view on industrial output to state it has bottomed. On inflation, BOJ lowered FY14/15 and FY15/16 projections by 0.3pts and 0.7% respectively to 0.9% and 1.0%; On GDP, BOJ lowered the current year target to -0.5% from 0.5% but raised its forecasts for the next two years. Despite inflation downgrade, primarily attributed to lower oil prices, the BOJ maintained its commitment to achieving its 2% target

USD/JPY pulled back in Asia with the BOJ leaving policy mostly as is. Disappointment was limited however with USDJPY already off from its early 118.80 high as longs pared positions into the announcement.. Nikkei sogginess ahead of/post-BOJ helped USDJPY lower. EURJPY too reverted down, off from 137.10 to 136.17 post-BOJ with bears rushing out of the closet and re-setting shorts.

EUR/USD opened in Asia at 1.1550 after moving lower in the US as the lift from the better German ZEW data faded fast. Idling between 1.1542-60 initially, it got a lift to 1.1573 as USD/JPY fell back through 118.00. The market is unlikely to push EUR/USD too far in either direction ahead of tomorrow’s ECB policy announcement. Fairly aggressive QE has already been discounted, and the market could be setting itself up for some disappointment. GBP/USD eased to 1.5136 early in Asia trading before bouncing later to 1.5176 as USD/JPY headed south. Conditions were very thin.

Elsewhere, AUD/USD opened in Asia at 0.8171 after holding up reasonably well despite broad USD strength in US trading.. Asia saw AUD/USD fall to 0.8155 early. Buoyant Asian regional stock market action and moves higher in commodities futures markets helped it track higher thereafter. At 0.8190 at the BOJ policy announcement, it popped to 0.8212 and then 0.8223. Resistance is eyed around 0.8250 and at 0.8300.

Looking ahead, UK will be the main focus in the London session as the BOE will release minutes of January MPC meeting. Markets will be watching for a discussion around the impact the fall in oil price could have on UK inflation. Carney has already indicated that there is a potential for the UK to enter deflation; therefore, any signs the BOE members think that rates should remain on hold for longer could keep GBP/USD on its current downtrend. We also get UK job data which is expected to show claimant count dropped -25k in December. ILO unemployment rate is expected to drop to 5.9% in November.

The highlight of the New York session is BOC rate decision markets expect the Monetary Policy Report to show downward revisions for both growth and inflation. Market consensus have put a one-third probability on the BOC cutting rates this year. Should markets price this in then this would support the long USD/CAD view. The focus will be on the bank’s analysis of the impact oil prices could have on economic growth.

OVERNIGHT PRICE ACTION:

EUR: Trend channel support holds decline on a closing basis, bias remains down below 1.1650
GBP: Below 1.53 keeps focus on 1.50, break opens 1.54/55 test before lower
JPY: 119 resistance, while 117 supports expect a 120 test
CAD: Broken 1.20 resistance should now act as support for next leg higher, caution on risk event today
AUD: 0.83 trendline test persists, while .83 contains .80 targeted, a break of 83 opens .8450

KEY TRADES:

ANALYSIS:

EUR/USD Short Term (1-3 Days): Bearish – Medium Term (1-3 Weeks) Bearish

• Projected down trend channel support remains in tact on a closing basis, previous support at 1.1750 now resistance. Price action likely to range ahead of ECB Thursday, below 1.1650 keeps immediate pressure on the downside
• Order Flow indicators; OBV consolidating at lows, Linear Regression and Psychology ticking up to test midpoint from below
• Monitor price action at 1.1750 retest from below to set short positions to target retest of lows

GBP/USD: Short Term (1-3 Days): Bearish – Medium Term (1-3 Weeks) Bearish

• 1.50 first downside objective while trendline resistance 1.54 holds. Shorter term horizontal resistance at 1.5250/1.53 continues to cap. Break of 1.5075 support to open downside objectives
• Order Flow indicators; OBV ticking up from lows, Linear Regression and Psychology attempting midpoint test from below
• Shorts in play, please see key trades for details

USD/JPY: Short Term (1-3 Days): Neutral – Medium Term (1-3 Weeks) Bullish

• 119 resistance rejects on first attempt while 117 supports expect retest of 119 on way back to 120. Failure at 117 opens retest/break of key medium term bullish support at 116
• Order Flow indicators; OBV ticking back up, Linear Regression and Psychology testing midpoints from below
• Risk free longs in play, please see key trades for details

USD/CAD: Short Term (1-3 Days): Bullish - Medium Term (1-3 Weeks) Bullish

• Resistance at 1.20 broken and should now act as support for next leg higher.
• Daily Order Flow indicators; OBV consolidating at highs, yet to confirm new highs in price, Linear Regression and Psychology piercing midpoints from below but are stalling
• Monitoring price action to reset long positions around 1.20

AUD/USD: Short Term (1-3 Days): Neutral - Medium Term (1-3 Weeks) Bearish

• Trend channel resistance at 0.83 test continues, bias remains to the downside while this area contains, a break opens .84/85
• Order Flow indicators; OBV ticking up from lows, Linear Regression pierces midpoint from above while Psychology recapture midpoint from below
• Monitoring resistance at 0.83 to set short positions initially targeting break of 0.80