Will Risk Rallies Take The USD/JPY Higher?

Asian equities are broadly higher, following the strong close in the U.S. last week, when the DOW hit another record high. The dollar stays firm against other major currencies, but is stuck in tight range so far. A main focus today is whether risk rallies would take the USD/JPY higher after taking out 95 psyhological level last week. BoJ governor nominee Kuroda signaled that the central bank would pursue aggressive easing soon after he's confirmed. He noted that the current scale of quantitative easing is "not a strong enough commitment to quickly achieve the 2 percent inflation target." He said that BoJ would "carefully consider" the proposal of buying derivatives.

The euro is still struggling around the 1.3 psychological level against the dollar for the moment, but it does look vulnerable. EU leaders will meet again in Brussels later this week on the bailout terms for Cyprus. IMF chief Lagarde noted that Cyprus has to address debt sustainability with a path to return to growth and markets. Meanwhile, German Finance Minister Schaeuble said there is a "complicated situation" in Cyprus. In Italy, president Napolitano is avoiding a call for a new election, saying that he may consider a national-unity government and accept a minority cabinet under Bersani. Last week Fitch Ratings said that "the increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession," warning that "the ongoing recession in Italy is one of the deepest in Europe."

Latest CFTC data showed further deteioration positioning in most major currencies in the week leading to March 5, including EUR, GBP, AUD and CAD. Euro net shorts rose to 26.1k, up from 9k, a sharp deterioration from the 38.0k net longs back in early February. Yen net shorts rose slightly 73.4k, up from 65.3k. Sterling net shorts rose to 43.8k, up from 36.1k. That's the seventh week straight of deterioration. Note that the best positioning in the last 12 months was 37.3k net longs back in Dcember. Aussie net longs dropped to just 7.1k contracts, compared to 208.8k net longs back in January. That's the sixth week straight of deteriorataion. Further deterioration will turn the Aussie into net short territory. Canadian dollar net shorts rose for another week to 46.7k, up from 21.4k - the seventh week straight of deterioration.

The sterling continues to be the weakest European major; this would also be reflected as the GBP/AUD dropped to new record low last week. It breached 1.4554 low set back in 2012, and reached a slow 1.4534 before recovering. The long term triangle pattern from 1.4758 has already completed at 1.5883 and the doend trend has resumed. A fall from 1.5883 is a medium term down trend is self, and should target 200% projection of 1.5883 to 1.5182 from 1.5673 at 1.4271. We'll hold on to this bearish view as long as 1.4882 resistance holds.
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