Yen Broadly Lower On Central Bank Stimulus, Resuming Down Trend

The yen, and to a slightly lesser extent the dollar, were broadly lower last week as risk markets rallied on central stimulus. DOW breached 15000 handle before closing at another record high of 14973, while S&P 500 finally closed above 1600, at another record high of 1614.4. Strength was also seen in commodity markets with gold closing the week slightly up at 1464.2 even though it clearly lost much momentum. Crude oil also extended recent rebound to close at 95.61. The dollar index dived to as low as 81.33 before recovering to close at 82.12. In the currency markets, yen crosses occupied the top movers chart with most yen crosses up over 1%. Among European majors, the swiss franc was the strongest, followed by sterling while the euro was slightly mixed. Commodity currencies didn't gain much, even though risk appetite was generally strong.

Technically, a major development was the renewed selling in the Japanese yen. The GBP/JPY was in the lead, taking out the recent resistance of 153.86. Other yen crosses were still limited below respective resistance, such as 99.94 in USD/JPY, 131.12 in EUR/JPY and 87.87 in CAD/JPY. The AUD/JPY lagged behind and was held well below 105.42 resistance. We'd expect further rally in yen crosses in general. In particular, a break of the mentioned resistance in USD/JPY, EUR/JPY or CAD/JPY would likely trigger more broad-based selloff in yen. The question is, which yen cross is in favor.

The dollar was a bit mixed near term. Bias is on the upside in the EUR/USD and GBP/USD, but momentum in the EUR/USD has been quite unconvincing. The AUD/USD looked bearish near term, but momentum was also unconvincing. The bearish development in the USD/CAD seemed quite solid. We favored the GBP/USD long last week, which was correct, but EUR/GBP didn't drop lower as we expected. The GBP/JPY, though, exceeded our expectation and led yen crosses higher. To conclude, we'd prefer to stay long in GBP/JPY and would also long CAD/JPY this week for upside breakout. Meanwhile, we'd also stay short in EUR/GBP for another decline, but would likely take profit in that case and switch the positions to yen crosses.

As widely expected, the Fed left its policy stance unchanged with asset purchases of 85B maintained. The policy statement was increasingly dovish with policymakers indicating that further easing would be adopted should the economic recovery stall. The central bank acknowledged economic growth at a moderate pace, but admitted slowdown in inflation and was less enthusiastic on the job market. It also raised concerns that the negative effects to be imposed by fiscal tightening. The policy statement was also a reminder that QE can move in both directions, rather than market focus of reduction later in the year.

Economic data from the U.S. were mixed. The non-farm payroll showed showed 165k in April versus expectation of 155k. The figure for March was revised up from 88k to 138k. The unemployment rate also unexpectedly dropped to 7.5%, hitting a four year low. ISM non-manufacturing index dropped more than expected to 53.1 in April, while ISM manufacturing also missed and dropped to 50.7.

The ECB cut the main refinancing rate by -25 bps to 0.5%, in response to the easing inflation and rising unemployment rate in the 17-nation eurozone. Risks of further easing remain to the downside, and President Draghi signaled that the central bank would not avoid negative deposit rate. The special liquidity facilities are also maintained until at least the middle of 2014. Later, ECB governing council member Nowotny noted that the ECB has "no plan in this direction" and markets has "over-interpreted the discussion". He said negative rate is "one of many options" but is irrelevant in the near future.

The European Commission published new economy forecasts. It expects the eurozone economy to contract-0.4% in 2013 and grow 1.2% in 2014. That's downward revision from February's projections of 0.3% growth in 2013 and 1.4% in 2014. Among the five largest eurozone countries, France, Spain, Italy and the Netherlands are expected to be in recession through 2013. Germany is still expected to eke out growth. Economics Commissioner Olli Rehn said that the European economy is expected to "stabilize in the first half of this year, GDP growth is projected to turn positive in the second half of this year and to gain momentum in 2014".

The U.K. manufacturing PMI improved notably from 48.6 to 49.8 in April, compared to an expectation of 48.5. It just narrowly missed 50 breakeven mark. Markit noted that "with forward-looking indicators such as new orders and the demand-to-inventory ratio also ticking higher, the sector should at least be less of a drag on broader GDP growth in the second quarter." PMI services rose to a eight-month high of 52.9 in April, beating expectations of 52.3. Markit chief economist Chris Williamson said that a broad-based improvement in U.K. economy was "becoming evident". He noted that the upturn is "led by the service sector" with signs of "stabilizing in manufacturing and construction" in April.

Also in the U.K., the National Institute of Economic and Social Research raised the 2013 economic projection to 0.9% growth, up from the prior 0.7% forecast back in February. 2014 and 2015 growth are projected to be 1.5% and 2.1% respectively, unchanged from prior projections. NIESR said that the "the growth rates we're talking about are nowhere near what you'd describe as recovery." It urged the government to boost capital spending with a package of around 2% of GDP to support recovery.