Markets Turned Into Consolidation Mode: Euro Topped, Yen Bottomed

Markets turned into corrective mode last week and pared back some of the powerful moves made back in January. Comments from central bankers were the main driver that halted the near term trend and triggered the pullbacks. The euro was broadly lower after ECB president Draghi mentioned that a strong euro could slow the region's economy. The Yen recovered as finance minister Aso said recent decline was too fast. The British sterling rebounded as incoming BoE governor Carney dented speculated of radical changes in monetary policies. Meanwhile, Aussie was weighed down by a dovish RBA monetary policy statement. Dollar benefited from the move in Euro and closed higher against other major currencies except for the yen and sterling. The dollar index has closed above 80 psychological level again.

Last week's developments showed that markets have turned into a corrective mode in general but we'd like to emphasize there is no evidence for a change in trends just yet. We're staying medium term bullish in euro and bearish in yen. The coming week or two would present opportunities to add to these euro long and yen short positions. We's also maintain that EUR/JPY would continue to outperform other yen crosses ahead. For the short term however, within this week and next, price actions in euro and yen pairs would likely be choppy with downside bias and euro and upside bias in yen. Thus, we'd tend to avoid these pairs in quick trades. Instead, USD/CAD's strength on Friday raised much chance of a rally resumption, plus AUD/USD stayed soft. Thus, for this week's trade, we'd prefer USD/CAD long and to a slightly lesser extent AUD/USD short.

In the Eurozone, the euro's strength was a major topic among officials as French President Francois Hollande expressed concerns over the strength of the single currency and called for a currency policy. His idea gained support from Slovak Prime Minister Robert Fico who said that his government would support such a policy. Greek finance minister Stournaras also said he's concerned about the high level of the euro. However, German Chancellor Merkel's spokesman Seibert noted that the exchange-rate policy cannot achieve "sustained competitiveness" and isn't an appropriate instrument. Seibert also noted that the recent gain in euro compensated for a "massive" depreciation during the debt crisis and "that's not such a bad thing".

ECB left the main refinancing rate unchanged and announced no new stimulus program. The overall tone of the statement remained dovish, noting that weakness in the economy remains. However, recovery would be seen later in 2013 "with domestic demand being supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, and export growth benefiting from a strengthening of global demand". The ECB has clearly noticed the strength of the euro but President Draghi reiterated the position that it is the effect on growth and inflation that will make them react.

In the UK, BoE left rates unchanged at 0.50% and kept the Asset Purchase Program at GBP 375b. The Sterling rebounded as incoming BoE Governor Carney talked down chance of radical changes in the central banks' policy. In his testimony to the UK parliament's Treasury Select Committee, Carney said that "flexible inflation targeting - as practiced in both Canada and the UK - has proven itself to be the most effective monetary-policy framework implemented thus far." But, "the bar for change to any flexible inflation-targeting framework should be very high." The comments disappointed some investors that hoped for adoption of nominal GDP targeting and more aggressive easing. Meanwhile, Carney also emphasized that a "credible plan is needed in advance" for unwinding the assets purchased "in order to maintain confidence".

The Yen was initially sold off after news that BoJ governor Shirakawa would step down on March 19, almost three weeks earlier than the originally scheduled end of his term. With the new schedule in place ,the new BoJ governor and two deputies could be sworn in simultaneously. The move will help Abe accelerate BoJ's policy shifts. It's speculated that the short list of candidates include Asian Development Bank President Haruhiko, former BoJ deputy Kazumasa Iwata and Thoshiro Muto. But no matter who Abe chooses, it's believed that the new governor would take strong easing steps soon after coming into power.

Finance minister Aso's comments were contradicting yet market moving. Last weekend, said the weaker yen was a result of the "policies aimed at ending deflation", but "not the goal". He hit back at Europe's claim that BoJ's move would contribute to a "currency war" and said that Japan "endured without complaining" when yen was strong as a result of the global financial crisis back in 2008. However, before the week closed, Aso said that "yen weakened more than we intended in the move to around 90 from 78". Aso's comment seemed to be inconsistent as for he sometimes talked up the yen but he talked down the yen today. Nonetheless, it should be noted that he's comments were about the pace of decline in yen but wasn't about the value of yen. So it's actually seen as aiming at cooling down the selling momentum only.

The RBA left the cash rate unchanged at 3%, yet policymakers indicated in the accompanying statement that the possibility remained for a further rate cut as inflation was contained by sluggish job market. The statement was dovish, reiterating the view that the mining sector had almost peaked. The RBA's outlook on growth showed little change from the December statement, noting that 'global growth is forecast to be a little below average for a time' but risks around this central scenario 'appear to have abated'. More in RBA Left Rates Unchanged, Indicated More Easing Likely. Later in the week, RBA released its quarterly MPS reducing its economic growth and inflation forecasts as "mining investment is expected to peak, both fiscal consolidation and the persistently high level of the Australian dollar will weigh on growth, and there is little sign of a near-term pick-up in non-mining business investment". The central bank forecast growth this year would be "below trend", at around 2.5%. CPI would rise 3% in the year to June 2013. The RBA forecast that employment growth to remain "modest over the course of this year, before rising gradually over 2014. The unemployment rate is expected to edge higher".Australian employment data was solid with 10.4k expansion in Jan while unemployment rate was unchanged at 5.4%.

The New Zealand dollar weakened earlier in the session on mixed job data. Employment unexpectedly contracted -1.0% qoq in Q4, versus an expectation of 0.4% qoq while unemployment rate dropped more than expected to 6.9%. Canadian dollar dropped sharply on Friday after poor job market data, which indicated-21.9k contraction in January versus expectation of 4.0k growth. Unemployment rate dropped to 7.0%.

In China, PBoC warned in a report that "economic recovery and demand expansion may pass into CPI in a relatively fast manner". The reported noted that "with the help of macro-economic policies, the country is expected to keep stable and relatively fast growth.” Meanwhile, monetary easing in developed countries "may make global capital flows more volatile, push up commodity prices and generate a greater spillover effect on emerging economies". The report signalled that while further monetary easing is possible, the room might be limited. China's trade surplus came in wider than expected at USD 29.15b in January, downside slightly from December's USD 31.62b. Exports rose 25.0% yoy, the strongest rise since April 2001 and well above expectation of 17%. Meanwhile, imports also surged 28.8% yoy, also beat expectation. The data showed that not only domestic demand is improving, but global demand is recovering too.