Time to play the crosses: long GBPCHF and GBPAUD?

The BoJ decided early this morning to keep its monetary policy unchanged by a unanimous vote and retain plan for a 60-70 trillion yen annual rise in the monetary base (JPY 270tr by the end of December 2014). Even though it was clearly expected by the market, Japanese policymakers’ lack of reaction continues to weigh on the equity market and the Yen. The Nikkei 225 index is now flirting with the 14,000 level (closed slightly above at 14,042) and is now down 14.40% since December’s high of 16,320; it is, as we have read in some reports, one of the biggest surprises this year with also persistent low yields in the US. Since the Fed decided to start its Taper in December last year ($10bn reduction each month), the 10-year US yield has constantly been trading lower and now sits at 2.53% (down from 3.04% on Jan 2nd), driving down the demand for long USDJPY positions. The graph below shows a daily chart on USDJPY over the past year As you can see it on the graph below, after the BoJ meeting, USDJPY broke its first support at 101.25 (200-day SMA) was sold to 100.80 before its started picking up again. We would stay out of it at the moment, even though we believe we should see USDJPY at higher levels in the coming days.

USDJPY-21-May

(Source: Reuters)

AUDJPY lost 3 figures since last week high of 96.10 and found support slightly above the psychological 93.00 level after it broke its 100-day SMA. The correction on AUDJPY came both from JPY strength and Aussie weakness as AUDUSD is now trading at a two-and-a-half week lows at 0.9220. The RBA minutes was released yesterday and the central bank said the board was considering to leave the current accommodative stance of policy for a considerable time. The trend looks bearish on the Aussie; as you can see it on the chart below, the next support on the downside for AUDUSD stands at 0.9170 (100-day SMA in blue), followed by 0.9050 (March 26 low).

AUDUSD-21-May

(Source: Reuters)

In the UK, April retails sales smashed expectations and soared 1.3% MoM (vs 0.5% expected), pushing the British pound above the 1.6900 level (1.6920 was the high of the day). The BoE minutes showed that all nine members of the MPC are in favour of keeping the Official Bank rate at current levels (record low of 0.5%) and the QE program at 375bn GBP at the last meeting in May. However, the tone was pretty hawkish as some of the policymakers are wondering whether they should start raising rates sooner that later. The BoE is still seen as the first major central bank to start raising interest rates in early 2015. We reached our first target on EUR/GBP at 0.8100 (next support on the downside stands at 0.8030); at the moment, we would also look to play some crosses such as long GBPCHF or long GBPAUD with a short term target at 1.5200 and 1.8400 respectively.

The Fed is to release the minutes from its late April meeting in one hour. My guess is that nothing new will be announced and policymakers will continue the ZIRP policy (low interest rates) in order to support the markets and especially the equity market which is struggling to find some meaningfull direction since the beginning of the year.

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