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The yen soared Monday morning on the back of a 5.9% rise in the Nikkei to a 6-month high of 11,450. The rally caught many investors by surprise and added to Friday's corrective gains in JPY. The Bank of Japan also said that it flooded Japan's monetary base by 27.5% y/y in February, the largest rise since the oil crisis of 1974. While this move was welcomed by the stock market, traditional economics teaches that is a negative for the yen. But, in the run up to March 31 fiscal year-end, the government's attempts to sustain a floor under Japanese share prices will have a restrictive effect on foreigners selling of Japanese shares over the coming weeks. The Nikkei has risen more than 10 percent since the government announced tighter restrictions on the short-selling of stocks as part of an anti-deflation package last Wednesday.
Last week saw another strong sell off in USD/JPY after being rejected around 135.00. USD/JPY broke trendline support around 133.50 on Thursday and has yet to recover. Now, a break of key support at 132.00/131.80 seen as bearish implication for the pair and would open up a downside target of 130.45. But downward momentum is expected to bottom today, which could lend support to the pair above the key 132.00/131.80 area. Upside capped at 133.0, 133.50 and 133.70, 134.00/10, 134.70/85 and strong resistance at 135.15. Support holds at 132.20 and 131.80.
Adding to yen strength was this weekend's failure of construction contractor, Sato Kogyo, which has been taken as a positive sign that non-performing loans are at last starting to be tackled. But, today's rally was mostly the result of the government's short-sighted policy to reduce stock market manipulation and urge domestic pension funds to buy along with adding funds to the stock buy-back scheme.
This, the government hopes, will avoid a financial crisis ahead of fiscal year end. If it keeps the Nikkei at or above 10,000, it would avoid the need for an infusion of taxpayers' money to help rid banks of non-performing loans. The government dislikes the idea of another public injection, as it would amount to an admonition of failure and be politically unappealing. But putting an artificial floor under Japanese share prices is likely to prove short-lived as dealers expect any gains to give way to a new wave of selling in the new fiscal year in April, which would lead back to yen weakness.
Moreover, with repatriation poised to slow near the end of March and net outward investment to resume thereafter dealers expect to see further yen weakness in the weeks to come allowing USD/JPY to target 140 once the 135.00/20 major resistance band is broken.
EUR/USD was unchanged after a better than expected rise in consumer confidence data which the European Commission said confirmed its forecast that the economic recovery in the Eurozone would begin in the first quarter of 2002. But the slight increase in consumer confidence to minus 9 from minus 11 only translated into a meager 0.2 rise in the overall economic sentiment survey to 99.2 in February from 99.0. Weighing on the whole was business sentiment which did not change at minus 14, disappointing the consensus estimate of an improvement to minus 11.9.
EUR/USD gave up earlier gains and fell back towards last week's 3-week low of 86.25. Traders were not encouraged by Eurozone prospects and sentiment is again turning bearish enough to target a move through 86.30/15 on its way to its 6-month low of 85.63. Support is seen at 86.30, 86.15, and 85.60. Resistance is viewed at 86.60, 87.10, and 87.85.
Meanwhile, the focus this week will be the BoE and ECB which both meet on Thursday this week. Stronger than expected E12 PMI data last week and a further gain in consumer confidence are likely to reinforce the ECB's resolve to keeps rates unchanged this week.
The BoE is also likely to keep rates unchanged after UK February manufacturing PMI rose unexpectedly above the 50-mark last Friday indicating manufacturing has recovered from yearlong contraction. However, sterling is likely to remain weakened by EMU expectations, and because of the fact that BoE Governor George again tried to talk down the sterling strength. Moreover, the strong performance of US stocks on Friday is likely to underpin USD as investors switch back into risk seeking mode. European majors should suffer from this shift as the Swiss franc loses its safe haven luster and sterling loses investors seeking safety in the FTSE.
GBP/USD tried to add to Friday's recovery from a 3-week low of 1.4110 but only reached a high of 1.4218, lower than Friday's high of 1.4230. Cable subsequently fell back to a day's low of 1.4159, just above support seen at 1.4150. Resistance eyed at 1.4180 and 1.4230. A break of 1.4110 would put 1.4045 under pressure and be seen as a bearish signal.