After Holiday Weekend, Market Volatility Could Increase

Abenomics will struggle to control a jump in government bond yields. The currency gained against most of its trading counterparts even after Haruhiko Kuroda, Bank of Japan Governor, faced the media to say that Japan could cope with rising interest rates. As bond yields gained, the cost of shorting yen has increased significantly and may yet spark a more aggressive strengthening of the yen. With markets in the U.S. and the U.K. closed yesterday we may see more volatility as these markets reopen this evening. The Yen has weakened more than 17% in the last six months so the magnitude of a reversal could be significant. USDJPY opens the morning hovering around 101.00.

Meanwhile in China, there are increasing signs that the leadership of President Xi Jinping is willing to tolerate a slowdown in China in favour of protecting the environment and may yet avoid the type of stimulus programmes that have been embraced by central banks across the world. The State Council, which is headed by Premier Li Keqiang, has approved a series of tac reforms to revamp the economy. Increased pressure on the labour market and rising local government debt burdens across the nation are forcing the new administration to push through reforms to avoid what some are fearing will be an inevitable hard landing for the world's second largest economy.

Markets in both the U.S. and the U.K. where closed for public holidays so limited liquidity saw relatively muted trading con-ditions overnight. European markets recovered form their first weekly loss in over a month as technology stocks claimed. The Stoxx Europe 600 index gained 0.3% and volumes were more than 60% lower than the average of the last month in quiet conditions. SAP, the world's largest maker of business management software, gained more than 2% on acquisition news. The DAX gained 0.94% while the CAC 40 rose 0.97%.

EUR/USD has been very much caught up in holiday markets with the entire globe seemingly turning off the trading switch whilst the Americans were in holiday mode. Euro opened up the new week a 1.2935 with a quick dip to 1.2915 before slowly climbing higher which resulted in a European session top of 1.2948. Resistances and 1.2950 being a sub handle was enough to cap the rise and like the other majors including the AUD the USD gained back some of the lost ground to see Euro close the day pretty much where it opened.

Now to the future outlook. We have changed out medium term bias to neutral as out medium term target was reached late week at 1.2800 and since the pair has been unable to find willing sellers despite all the negativity surrounding Europe and the belief that the US Fed will cut back QE in the coming months. We believe the Europe factor is correct but the QE program in our view will not change this side of Christmas.

Compass Direction
Short-Term Medium-Term
NEUTRAL NEUTRAL
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AUD/USD pretty much followed the expected path over the last holiday 24 hours with early door bears taking the price to 0.9617 as they tried in vain to shakeout the weekend bulls but solid buying for a holiday session from range traders and alike stopped the pair reaching the previous 0.9595 lows. The following retracement saw the price build momentum early in the European session into the very early 0.9660’s. It did look likely to continue higher but with all the calls from market players about 0.95 or lower, bears and those same rangers capped the price. The pair ended up drifting to mid range 0.9636 to trade out almost the entire US session and that’s where we have it now at the Sydney open.

It’s an empty calendar for the Asia and European sessions, so we will be expecting more of the same in the way of price action. We have changed our medium term bias from bearish to neutral as we believe we are close if not at the bottom and a turnaround towards parity is the next move.

Compass Direction
Short-Term Medium-Term
NEUTRAL NEUTRAL
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