Central banks dictating play

Four markets in focus today: USD/JPY, Spot Gold, Germany 30 and Oil Search.


USD/JPY continues to move in contrarian ways to the fundamentals. The BoJ wants a lower yen yet the market is doesn’t agree. The Fed is neutral on the currency and is currently unwinding its stimulus program which deeply discounted the USD; the BoJ is looking to devalue its currency to counter an uncompetitive export-based economy. The fundamentals are a medium-term view and the pair will likely move up.

However, since February 15 the pair has been stuck in a range which has continuously reverted to the 20-day moving average. This morning Japan’s core CPI year-on-year came in ahead of expectations at 3.2% (versus 3.1%), the fastest growth in inflation since 1991, but this has been sparked by the consumption tax, which saw household spending collapse by -4.2% year-on-year.

Neither piece has moved the pair, therefore on a short term view we see the USD/JPY stuck between ¥102.22 and ¥101.22, which is two standard deviations from the 20-day moving average. We see more upside to the pair on fundamentals, but it is more likely to track sideways in the interim as it reverts to the 20-day moving average.

Spot Gold

For the sixth consecutive day the precious metal logged a loss; falling to US$1255 an ounce. This is likely to see some bargain hunting in the Asian session as the gold bugs buy. However the clear breakout on Tuesday looks like holding, based on previous breakouts of the triangle-like consolidation.

Support levels at US$1273 and US$1269 – the convergence of the August 2013 highs and lows - were easily broken. Consolidation around $1260 is likely, which is the 38.2% retracement of the December low to March high. If this level is broken a complete retracement of the low to high is likely, and US$1180 is highly probable.

Germany 30

We continue to see the DAX as one of the best places to play the European recovery story and the domestic demand from Asia. The falling EUR, its high-end exports and a thirst from Asia for its products are bottom-up fundamental support. The momentum trade is still in place and weakness in the EUR is only going to add support to the DAX.  Having broken through resistance around 9800 on Monday, the psychological mark of 10,000 is the next level to watch. It could move higher.

Oil Search

OSH looks like it is taking a breather, having rallied rapidly on the announced the PNG LNG project, which came online four months ahead of schedule. This would be the second rest period if it takes effect and we could see OSH drop back to $9.17, which is the 20-day moving average.  However, fundamentally this stock has upside potential and would see buying the dips at $9.17 or less as advantageous heading into its full-year numbers in July.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.