G20 Risk Cleared: Yen Downtrend To Resume

The so-called "currency war" sparked a great deal of volatility in the Japanese yen last week, and concerns surfaced that the expansive policies which drove down the the currency would be criticized by both G7 and G20 leaders. The G7 statement released in early in the week and the subsequent comments from officials confused the markets. But finally, there was some steep selloff in the yen late Friday following the news that the depreciation of the Japanese currency won't be singled out. Indeed, Japan escaped criticism by the G20 statement which ended with pledge to refrain from competitive currency devaluation. The yen's downtrend is now set to resume this week. Meanwhile, The euro extended its correction last week as data showed a deepened recession in Eurozone, while traders lightened up positions ahead of the Italian elections. The sterling also weakened broadly after a dovish BoE quarterly inflation report. Surprisingly, last week the New Zealand dollar was the strongest currency after some positive economic data.

Our long USD/CAD strategy for last week was correct, but the short AUD/USD strategy didn't yield any result even though it wasn't entirely wrong. From a technical point of view, the euro's correction against the dollar seems incomplete, and it also faced some difficulty in resuming a recent rally against the Sterling and Aussie. However, as the euro's correction has lasted for two weeks, there shouldn't be much room for any further downside. Considering these two contradicting facts, we'd avoid the Euro this week. The uncertain near term outlook in euro also makes us prefer to avoid the sterling and Swiss franc. Meanwhile, commodity currencies were mixed. While the New Zealand dollar was strong, Friday's sharp selloff showed sign of near term topping. The Aussie is still bearish but there wasn't any convincing sign of a steep fall ahead. Nonetheless, the Canadian dollar looks set to accelerate its decline against dollar. As mentioned above, we do believe there's a high chance for the yen to resume its down trend this week as the G20 uncertainty was cleared. So, to conclude, we'd prefer to long USD/JPY and USD/CAD this week and avoid European majors.

After a two-day meeting in Moscow, G20 leaders agreed to a joint statement that they would refrain from competitive devaluationb and "resist all forms of protectionism and keep our markets open." Meanwhile, they also pledged that "advanced economies will develop credible medium-term fiscal strategies". The Yen was not singled out in the statement, indicating that Japan is given a greenlight to continue its expansive policies. Also, the statement itself is not much stronger, but may likely correspond to the G7 statement released earlier in the week stating that G7 policies "will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates."

Japan was the major focus last week. In addition to G7 and G20 talks, Japan also released it's Q4 GDP figure. The Japanese GDP unexpectedly contracted -0.1% qoq in Q4, versus consensus expectation of 0.1% qoq growth. That's the third straight quarter of contraction even though it improved from Q3's -1.0% qoq drop. Japan is still in a mild recession, and the -0.6% qoq fall in deflator indicates that Japan is still staying put. The data should strengthen the case for prime minister Abe to push for more monetary stimulus to end deflation, and boost recovery. BoJ left rates unchanged at 0-0.1% on a unanimous vote, as widely expected. The stimulus programs were also left unchanged. The central bank noted that "Japan's economy appears to have stopped weakening" and the pace of export decline has slowed as international "investors' risk aversion has abated," and that the global economy has shown "signs of picking up". The Japanese economy is expected to "level off more of less for the time being". The CPI is expected to "turn negative" due to reversal of energy prices but would then reverse again to 0%. The BoJ pledged to "pursue aggressive monetary easing", but emphasized that it aims to "achieve price stability on a sustainable basis", that is, achieving it's 2% inflation target at the earliest possible time. Talking about BoJ, it's reported that prime minister Abe is close to making a decisions on the next BoJ head, who will replace Shirakawa on March 19. Former BoJ deputy governors Toshiro Muto is being reported as the frontrunner, and is considered by the markets as the least dovish candidate. Other alternatives include Kazumasa Iwata and Haruhiko Kuroda.

In the Eurozone, the Q4 GDP contracted by -0.6% qoq versus expectation of -0.4%. That's also the third consecutive quarter of contraction and the situation iseven worse, considering the best of the last five quarters of 0% growth were in Q1 2012. The Q4 also had the worst quarter since the 2009 Q1. Even more worrying was that Germany, France, and Italy all recorded disappointing results. The German economy contracted -0.6% qoq comparing to an expectation of -0.5% qoq. France contracted -0.3% qoq versus expectation of -0.2% qoq. Italy contacted for the sixth quarter by -0.9% qoq comparing to expectation of -0.5% qoq.

In UK, BoE's quarterly inflation reported showed that policymakers are ready to tolerate higher inflation to boost economic recovery. While the BoE expected the UK to have a "slow but sustained recovery" this year, growth projection for the year to 1Q2014 was revised to 1.7%, down from prior projection of 2.0%. The economy is expected to be back at the pre-crisis level in 2015. Meanwhile, inflation is expected to stay above the central bank's target of 2% until at least end of 2015, and would peak at 2.3% in 2H 2013. However, the MPC emphasized that "as long as domestic cost and price pressures remained consistent with inflation returning to the target in the medium term, it was appropriate to look through the temporary, albeit protracted, period of above-target inflation." And, "... attempting to bring inflation back to the target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term." Inflation data from UK saw CPI unchanged at 2.7% yoy in January versus expectation of a rise to 2.8% yoy. Core CPI moderated to 2.3% yoy, down from 2.4% yoy in December. PPI input jumped to 1.8% yoy, PPI output dropped to 2.0% yoy, PPI output core dropped to 1.4% yoy.