USD/JPY and EUR/USD at Critical Levels

The JPY is in focus this morning as the USD/JPY briefly flirted with the 80.00 level.  There is speculation of additional easing from the BOJ at its next meeting.  The BOJ has been discussing measures that will boost the recovery.  The direction for the USD/JPY seems clear for the short term and it looks like only a matter of time before the currency pair moves above the 80.00 again.  The EUR/JPY cross has made a five month high at 104.59 as the JPY is weaker against all currencies.

The EUR has traded towards the bottom of its overnight trading range and has weakened against most of the currencies other than the JPY.   Moody’s came out yesterday with downgraded ratings on five Spanish regions.  Moody’s stated that the downgrades were “driven by deterioration in their liquidity positions, as evidenced by there limited cash reserves as of September 2012, and their significant reliance on short-term credit lines to fund operating needs.”

Adding to the pressure on the EUR, is another legal challenge facing the ESM.  It has been reported that an independent member of the Irish parliament has issued a complaint, and this complaint has reached the EU Court of Justice.  The Luxemburg based court has engaged the full compliment of 27 judges to consider the challenge.  There will be a hearing today with an expected ruling to come as soon as year end.   A ruling in favor of the complaint could end the European Stability Mechanism, ESM, before it really begins.  Sides are being taken here, as analysts are considering the ESM as a necessary compliment to existing EU structures.  The argument here according to the member issuing the complaint is that the ESM violates the “no-bailout” provision under EU law and therefore encroaches on the EU’s role in economic and monetary policy.  The challenge states that a decision to change a legal provision in the treaty to allow the creation of the ESM was done incorrectly.

The ESM is set to replace the European Financial Stability Facility, EFSF.  These two funds are supposed to work together until mid 2013, when the stability facility is phased out.  The EFSF has already used 192 billion EUR of the 440 billion EUR allotted on loans to Ireland, Portugal and Greece.

This latest news is certainly weighing on the EUR.  After opening at 1.3070 the EUR has drifted lower testing the 1.3020 support area.  Adding to the EUR’s woes was the release of French Business Climate for the month of October, which fell to 85 from 90 the previous print.  This number had been forecasted to come in at 90.

In other currency news, Canada will move to the forefront this morning, as the Bank of Canada is expected to leave interest rates unchanged at 1.00%.  The key factor here will be the accompanying statement with the announcement.  Traders will be looking to see if the wording of the statement has changed removing the tightening bias.  There is speculation that this will happen after a speech made by Bank of Canada governor Carney warned the slowdown in the global economy could spill into Canada.  In advance of this announcement, USD/CAD has tested the .9950 resistance level.

It looks like it could be a busy Tuesday on a number of levels.  USD/JPY could test 80.00, EUR/USD is being pressured towards 1.3020, and 1.3000, and USD/CAD on a break of 99.60, could look at the parity level.

Further reading: EUR/USD forecast

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