3 October 2002, 12:12  European Forex Trading Preview

The dollar was unchanged against the European majors but came under further pressure against the yen in Tokyo this morning. Despite the Nikkei falling to a fresh 19-year low of 8,936 and ending below the 9k mark for the first time since August 1983, the yen rose from Wednesday's technically oversold position of 123.32 and 121.36 against the dollar and euro. German markets are closed today which could lead to lighter trading, but markets will focus on the September PMI Services reports for the Eurozone and UK, which are both expected to remain in the expansionary zone with a reading above 50 points. But European bourses are expected to open in the red after another dismal day on Wall Street. Fears of a US-led war on Iraq as well as downbeat comments from the Fed's Robert Parry who said their was no doubt that the sharp falls in equities was weighing on consumer and corporate spending.
USD/JPY came off of overnight highs of 123.32 after showing a technically overbought status and with traders reluctant to buy dollars ahead of Friday's labor report. The dollar also broke below near-term T/L support-turned-resistance at 122.90, which should continue to be a barrier to further gains. Follow up resistance is seen at 123.32, the session high, and 123.50. Support is seen at 122.50, the 38% retracement of the decline from 133.81 (April 1) to 115.50 (July 16), followed by 122 and 121.38, the 38% retracement of the climb from 116.84 (Sept 3) to 124.19 (Sept 23).
Reports that Heizo Takenaka would appoint Takeshi Kimura to the special task force aimed at accelerating the disposal of non-performing loans is expected to keep pressure on the yen. Kimura, who has been known to push banks towards more stringent loan assessments, also has a reputation of being reform-minded. The appointment set off a fear that the new task force would lead to an acceleration of corporate bankruptcies, which would be deflationary and necessitate a weaker yen.
Moreover, Japan's Vice Minister for International Affairs, Haruhiko Kuroda, in New York on Wednesday said Japan and the international community could accept a weaker yen if the move is driven by economic fundamentals. He also said he expects bad loans to be cut in half by 2004. In addition, Kuroda said the government is determined to combat the epidemic deflation that has plagued Japan for the past 4-years, as well as clean up Japan's banking system. Markets, rightfully so, continue to remain skeptical of Japan's plans as it has been their tendency to initially present dramatic reform initiatives only to water them down later on.
But also keeping pressure on the yen are capital flows out of Japan. Data from the Ministry of Finance for the week ending September 27th showed that Japanese investors significantly increased their purchases of foreign stocks. Japanese investors purchased a net 279.0 billion yen in foreign stocks, up considerably from a week before at 5.2 billion yen. Consequently, they reduced their net purchases of foreign bonds to 432.7 billion yen from 541.8 billion yen a week earlier. Meanwhile, foreign investors marginally increased their net selling of Japanese stocks to 425.5 billion yen, from 424.0 billion yen the previous week. The most drastic change took place in their net investments in Japanese bonds. Foreign investors scaled back their net selling of Japanese bonds to 19.5 billion yen, from net selling 382.3 billion yen a week earlier.
Traders remain happy about the prospects in sterling, keeping the pound back above key T/L resistance-turned-support at 1.5650 and pushing it to a session high of 1.5705 in NY trade. Sterling now needs to overcome this week's two-month high 1.5764 to target 1.5780 ahead of key resistance at 1.5866, the 26-month high from July 26th. Support is seen at 1.5645 followed by 1.5595, the 62% retracement of the decline from 1.5865-1.5160
The pound is now up six cents from its August lows against the dollar while the euro languishes nearly 4 cents off its July high of 1.02. Moreover, the pound has recently broken key trendline resistance against both the dollar and yen as it is helped by a higher nominal interest rate and rising oil prices.//www.forexnews.com

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