Dollar And Yen Lower As Bernanke Lifted Risk Appetite

Yen weakened broadly in a rather dull week even though there were full of important events. Markets were back into risk seeking mode after Fed chairman Bernanke's semi annual testimony. DOW and S&P 500 closed at new record high of 15543.74 and 1692.09 respectively. And strong risk appetite helped yen crossed extended recent choppy recovery. Dollar was the second weakest major currency last week, partly because pull back in US treasury yields continued. Though, it's bounded in prior week's range except versus sterling, which was lifted by the BoE minutes. Canadian dollar lagged behind other commodity currencies and fell versus others except dollar and yen.

Technically, dollar's near term outlook against European majors remained mildly bearish in spite of some consolidative price actions last week. We'd favor further downside in the greenback against Euro, Sterling and Swissy. The greenback also seemed to have bottomed against Aussie and Kiwi already while USD/CAD's outlook stayed bearish. So except versus yen, more downside is expected in dollar.

On the other hand, yen also revived bearishness against other major currencies. In particular, it closed below prior weeks low except versus dollar and Aussie. Event though we'd expect yen crosses to be limited by May's highs and reverse,, there is still some more room for near term rally.

Among European majors, sterling seemed to have an upper hand while Euro looked soft. But we'd like to point out that EUR/CHF and EUR/GBP are both staying above respectively minor support levels and thus retaining bullish outlook. EUR/AUD was also bullish, looking at resuming recent rally later.

Our strategy of AUD/JPY was wrong last week as the cross recovered ahead of recent low made back June. Based on the above, we'd be going long in AUD/USD and EUR/JPY this week.

To recap, Fed's Chairman Ben Bernanke reiterated in his congressional testimony that the tapering of QE measures would be dependent on economic data and do not have a pre-set schedule. He also indicated that the central bank could raise asset purchases if required to meet the inflation and employment mandates. Yet, the Chairman retained the stance that tapering could begin sometime later this year. From now to September, the timing that most market participants anticipate tapering would begin, there would be two employment reports which might affect the Fed's decision.

Fed Beige Book economic report. noted that economic activity expanded as a "modest to moderate pace" in recent weeks. Manufacturing increased in most districts, consumer spending also increased generally across all districts. Residential real estate and construction activity increased at a moderate to strong pace in all reporting districts. Financial services conditions were steady to improved across all districts. Meanwhile, labor market held steady or improved at moderate pace in most districts. Price pressure was stable or modest across districts. There reported suggested uniform improvements in US and pointed to better growth in the second half of 2013.

BoE minutes revealed that the MPC voted unanimously by 9-0 to keep the asset purchase target unchanged at GBP 375b. During prior meeting, the ex-BoE governor King, and two other policy maker Fisher and Miles, voted for expansion of the asset purchase. But this time, Fish and Miles dropped such call. The minutes also noted that "given the already large size of the asset purchase program, there was merit in pursuing a mixed strategy with regards to the different policy instruments." And, "the committee's August response to the requirement in its remit to assess the merits of forward guidance and intermediate thresholds would shed light on both the quantum of additional stimulus required and the form it should take."

Minutes or BoJ's June 10-11 meeting noted that there were discussions on whether to take measures to calm recent bond market volatility. There were discussions about extending the maximum duration of fixed-rate funds offered via market operations from one year. Some policy makers noted that would restrain "excess interest rate fluctuations". However, some opposed as that might be misread by market as a change in the central bank's framework. After all, most members believed that markets will stabilize over time. Meanwhile, one member proposed to limit the duration of the monetary stimulus to around two years.

BoC left rates unchanged at 1.00% as widely expected. The central bank downgraded the global growth forecast for several reasons. Those include fiscal consolidation in US, weak economic activity in Eurozone and slowdown in China and other emerging markets. Canadian growth is expected to be "choppy in the new term" but outlook is unchanged from April's MPR. GDP is projected to growth 1.8% in 2013, 2.7% in both 2014 and 2015. And the central bank expect growing real GDP to "absorb" excess capacity and close the output gap around mid-2015. Inflation is expected to "remain subdued in the near term". But as economy gradually returns to full capacity, BoC projected core and total CPI to return to 2% around mid 2015. It noted that the "considerable monetary policy stimulus currently in place will remain appropriate". Though, it noted that "over time", "gradual normalization of policy interest rates can also be expected".

The RBA in its minutes for the July meeting downplayed the easing bias for future monetary easing. It stated that the current level of Australian dollar and stimulus implemented over the past months should be appropriate in bolstering the economic recovery for the time being. It also noted the pickup in inflation outlook as driven by the depreciation of Australian dollar since May. Yet, it affirmed that further rate cut would still be possible if needed.

China's GDP expanded 7.5% y/y in 2Q13, down from 7.7% in the prior quarter. On other data, IP climbed 8.9% y/y while retail sales rose 13.3% y/y in 2Q13. The Statistical Bureau commented that "major indicators are within our targeted range but we face a complex situation". The government department stated that measures such as heightened property tightening campaign, rules to curb misuse of public funds and the exit some previous stimulus policies would affect growth in the short- term. Yet, these measures would help the economy in the long run.