Dollar Higher Against European Majors, USD/JPY Heading To 100

Markets were dominated by strong equities, strong dollar and weak yen last week. It's clear that economic data from the U.S. showed impressive improvements in domestic economy. Meanwhile, Bernanke and Yellen indicated that the central bank would leave stimulus in place while data continues to show improvements. The DOW jumped to new record high, closing strongly at 14397, while benchmark 10 year yield was also back above 2% to close at 2.056%. The Dollar was taken higher against European majors; the yen and the dollar index surged for another week to close at 82.69.

Nonetheless, the dollar was still bounded in range against commodity currencies, and the EUR/USD struggled to move away from the 1.3 psychological level. The Japanese yen's weakness was indeed more broad based and one-sided. This comes on expectations of aggressive easing measures once Kuroda comes on board and holds his first BoJ meeting in April. There were a number of central bank meetings last week but ECB, BoE, RBA and BoJ meeting failed to yield much impacts. BoC's neutral stance looked set to trigger another round of selloff in the Canadian dollar but the loonie was then saved by strong Canadian job data.

Even though the markets were overshadowed by renewed buying in yen crosses, our strategy of holding short to GBP/USD was correct. The pair finally gathered momentum to break away from 1.5 psychological level on Friday. Our strategy of short EUR/USD hasn't yielded much result yet, but selling could take off once 1.3 psychological level is cleared up this week. USD/JPY's firm break of 95 psychological level indicates strong underlying momentum, but European yen crosses lagged behind with EUR/JPY and GBP/JPY limited below recent highs. We suggest to hold on to GBP/USD and EUR/USD longs for the moment, but would start to look for opportunities to switch to USD/JPY instead, until it hits the 100 psychological level.

In the US, non-farm payroll showed an impressive 236k growth in the US employment market in February, much stronger than expectations of 158k. January's figure was revised down from 157k to 119k, but that was more than offset by February's surprise. Unemployment rate also dropped to a five year low of 7.7%, down from 7.9%. The ISM services unexpectedly improved to 56 in February. Note that the ISM manufacturing index, released the previous week, unexpectedly rose to 54.2 in February. The Beige Book suggested that economic activity expanded at a "modest to moderate pace" with the majority of Districts reporting a "modest" improvement in labor market conditions. Hiring plans were, however, "limited" in several Districts. On consumer spending, most Districts reported an expansion despite slowdown in several others. Manufacturing activities "modestly improved in most regions" and residential real estate markets "strengthened in nearly all Districts".

Both the ECB and the BoE left their monetary stance unchanged. Draghi expected the Eurozone to return to growth in 2014 with the forecast range between 0-2%. Inflation next year would range from 0.6% to 2%. The BOE announced that the Bank Rate will be kept at 0.5%, and the asset purchases at 375B pound. The committee only released a short statement and details of the discussion should not be disclosed until release of the minutes on March 20.

BoJ governor Shirakawa held his last meeting, and kept rates unchanged at 0-0.1% by unanimous vote. A board member proposed bringing forward open-ended JGB purchases but that was voted down by 8-1. Another board member proposed explicitly saying that the bank will keep rates near zero until hitting the 2% inflation target but was also voted down by 8-1. These proposals were seen as laying down the ground work for aggressive easing when Kuroda takes up the BoJ governor role later in the month and there would likely be some eye-catching moves in his first meeting in April. The economy assessment was somewhat upgraded as the BoJ said it appeared to "have hit bottom".

The Bank of Canada left the overnight rate at 1%, with the Bank Rate at 1.25% and the deposit rate at 0.75%. The policy statement was dovish, as policymakers saw less urgency in rate hike. The tone of the statement was similar to the previous one, with a broad outlook for the Canadian economy similar to January's. Policymakers expected domestic growth would gain momentum through 2013 amid better household spending, business investment and exports. The BOC left Policy Rate at 1%. Economic conditions suggested pause would prolong. The Canadian dollar jumped on Friday as the job market grew 50.7k in February, compared to expectations of 7.8k while the unemployment rate was unchanged at 7.0%.

The RBA left the cash rate unchanged at 3% for a third consecutive in March. While the policy outlook would remain supportive, the central bank paused this month, as it was suggested that Australia's economic growth was close to trend with the help of increase in resources sector investment. The central bank statement showed few changes from the previous month, signaling that policymakers were holding on more or less to the same views. The RBA Left Rates Unchanged For Three Months, signaled further easing likely. The Aussie was supported by solid retail sales and GDP data.