Yen Broadly Lower As Dovish Yellen Boosted Stocks To Record High

The Japanese yen was sold off broadly on strong risk appetite in the US markets last week. DOW and S&P 500 were pushed to new record highs by Yellen's comment on her Fed chairman nomination confirmation hearing with Senate. The Dow ended the week up nearly 200 pts at 15961.7. S&P 500 rose 27.6 pts to close at 1798.18, just shy of 1800 level. Treasury yield pared some of recent gains with 10 year yield back pressing 2.7 to close at 2.709%. 30 year yield was also back at 3.801% level. The Dollar index, on the other hand, was stuck in tight range without a clear direction. While the impact from risk appetite on yen was clear, it's not too apparent elsewhere in the forex markets. The Australian dollar was indeed the second weakest currency last week, followed by the greenback. Among European majors, Euro was the strongest one even though it finally gave back some way to sterling towards the end of the week.

Current Fed vice chairman Yellen reiterated her dovish stance and defended the central bank's accommodative monetary easing measures. Yellen indicated that the best way to normalize monetary policy is to normalize the economy, noting that “a strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases” and “Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy”. In short, economic developments remain the key determinant of the tapering schedule on which Yellen refrained from giving any hints. More in Dovish Yellen Defended Easing As Economic And Employment Growth Remain Far Short Of Potential?

In UK, BOE signaled in its quarter inflation report that it might raise the policy rate in as soon as 3Q15 as the economy has recovered "robustly" and inflation moderated. The BOE acknowledged that the economy is growing at the "fastest pace in 6 years" and confirmed that "the recovery has finally taken hold". Yet, the central bank also reminded that a sustained recovery, which requires a revival of business investment and price stability, is needed to put people back in work and use up the slack in the economy". The unemployment rate is increasingly likely to reach the 7% threshold, the triggering point for the central bank to begin thinking about hiking the Bank rate from a record low 0.5%. More in BOE Expects Rate Hike to Come in 3Q15, Earlier than Previous Forecast of 2Q16.

The Chinese Communist Party's 18th Central Committee Meeting (Third Plenum) concluded with a communiqué approving the 'decision on major issues concerning comprehensively deepening reforms'. The communiqué is a brief one with more details expected from the 'decision' document to be released next week. It appears that the government has planned to undergo broad-based reforms to achieve ambitious goals which would lead the economy to be more market-based. The government aims to see achievement in key reform areas by 2020. As the communiqué is rather abstract without giving much idea on how the reforms would be carried out, investors would probably find this long-awaited meeting rather disappointing. More in China Outlined Ambitious Economic Reform Plans, Details are Scarce though.

Technically, the development in dollar last week was quite mixed. The USD/JPY's momentum was certainly bullish. The EUR/USD and USD/CHF were both held by near term levels while maintain dollar's mild bullishness against euro and Swiss Franc. However, firstly, GBP/USD's break of 1.6117 resistance last week suggests that the pair is heading back to 1.625 level. The USD/CAD failed to sustain above a near term trend line resistance and is possibly reversing on loss of momentum. The AUD/USD was also held by a near term support level at 0.9280. So, it's hard to say whether the greenback is bullish or bearish in near term.

Among the European majors, Sterling seemed to have regained an upper hand against euro in spite of early selloff during the week. As mentioned above the GBP/USD is displaying some near term bullishness while EUR/USD stayed near term bearish. The development in EUR/GBP, which bounced off from the falling 55 days EMA, also suggested that another low below 0.8299 in the cross is likely. So we're prefer Sterling over Euro this week.

Comparing European majors to commodity currencies, while EUR/AUD's rebound was impressive, it was held below 1.4529 resistance so far and thus, there is no confirmation of reversal. The EUR/CAD's outlook was similar to the EUR/USD as the recovery from 1.3885 looked corrective. The GBP/AUD's momentum as much clearly and we'd likely see a test on 1.7483 resistance soon. But, the GBP/CAD seemed to have lost some upside omentum below 1.6961 recent high. The picture between Europeans and commodities were further complicated by the risk of reversal in the USD/CAD and AUD/USD.

While the Japanese yen's downside momentum looked strong, it should be noted that the USD/JPY is still bounded in a range pattern and price actions could stay choppy and directionless in near term. The GBP/JPY, a relatively stronger one, is facing a key resistance level at 163.05 and has much risk of reversal.

So, considering the above, we'd like to give up the EUR/USD short positions, which was at a small loss. Also, the AUD/USD short should be closed as the 0.93 target was hit already. Instead, we'll turn GBP/USD long this week for a near term trend for 1.625. And, pay attention to the USD/CAD and AUD/USD. Break of 1.0397 in the USD/CAD will trigger a short trade while break of 0.9421 will trigger a long trade.