EMISSIONS: German EU ETS Auction Clear Higher, Above-average Participation

• Despite pulling back from the morning highs, EURJPY remains 0.8% higher today as the cross extends the rebound from Friday’s low. While the move higher is allowing a recent oversold condition to unwind, the impressive recovery reached as much as 406 pips, perhaps exacerbated by a short-term positioning squeeze ahead of US inflation data. Furthermore, the hawkish ECB repricing and strength for European equities will have provided additional tailwinds.
• Onshore Japan markets have returned today after yesterday's public holiday, so there may also be some catch up demand in play for Cross/JPY. There are reasonable option expiries in USDJPY for the NY cut later between 153.50-70($1.7bln), which could also be influencing spot trends.
• We noted that BoJ Governor Ueda appeared before parliament earlier, noting there is a risk that higher food inflation impacts inflation expectations more broadly. Ueda said the BOJ is closely watching US economic measures and their impacts, while reiterating that further hikes will depend on the economy and price developments.
• For EURJPY, moving average studies are in a bear-mode position and this suggests that the latest recovery is likely a correction. Initial resistance to watch is 159.93, the 20-day EMA. Key short-term resistance remains further out at 161.09, the 50-day EMA.

“Today ESM, the European Stability Mechanism has sent a Request for Proposal to a selection of banks from the EFSF/ESM Market Group with regards to an upcoming transaction, subject to market conditions.”

• We expect a transaction for Monday/Tuesday next week, and had flagged this possibility in our daily publication.