Yen Crosses Dived, Dollar Looking To FOMC For Support

Despite an intra-week pull back, the yen extended the recent rally after markets were disappointed by the BoJ's lack of extra actions. The Nikkei also responded by dropping to close at the 2013 low of 12686.5. Risk aversion dominated markets for most of the week; the FTSE dropped for the fourth week and barely managed to defend the 6200 level. The DAX also followed, weakening for the third week in a row. U.S. equities consolidated in a recent range around the 15000 level. In the currency markets, the U.S. dollar and Canadian dollar were the weakest two, dropping more than -3% against the Japanese yen.

While European majors extended the recent rally against the greenback, the Euro, Sterling and Swissy have been losing some upside momentum. Markets are being cautious ahead of the FOMC rate decision this week. There has been some concern that the Fed will taper the stimulus program before the economy could gather enough sustainable momentum. It's expected that Bernanke will lessen the fears of the impact of Fed's unwinding of the asset purchase program, as well as the fear of rate hike. The development in U.S. stocks, yields and the dollar would very much depend on the event.

Technically, we'd like to point out that the pull back in DOW and S&P 500 were relatively shallow so far. Both are just stuck in a range established in May, and are holding well with 55 days EMA. Both are still in healthy uptrend so far. The U.S. Treasury yield did have a sharp dip on Friday, but managed to hold above near term support level, hence no change in the uptrend. The dollar index dived further as low as 80.50, and there is no sign of bottoming. The Dollar index might drop further to 80 psychological level. However, the dollar's weakness was not that clear against European majors. While the EUR/USD and GBP/USD extended the rally, bearish divergence condition was seen in both pairs in 4 hours MACD. We'll avoid the dollar this week.

On the other hand, the development in the Nikkei was quite bearish, as the recovery was limited by 55 days EMA and the index dropped to new 2013 low. Yen crosses also extended the recent fall after brief recovery, and stayed bearish. A further decline would probably drag down yen crosses in general. The Canadian dollar was weak, but maintained a mild upper hand against the greenback. The aussie has bottomed against both the dollar and Euro.

Our strategy for short AUD/USD was somewhat correct last week, as it made a new low at 0.932, but fell short of our target 0.93. It has bottomed earlier than expected. We'd close out the position this week, and turn to short yen crosses. Considering the above analysis as well as the possibility of topping in European majors in the near term, we'd tend to short European yen crosses. As the EUR/GBP showed no direction at all, we'd short both EUR/JPY and GBP/JPY this week for short term trades.

A recap of some of last week's events: the BoJ announced a meeting to stick to the money market operations, which aims at increasing the monetary base at an annual pace of about 60-70 trillion yen. Policymakers also noted that Japan's economy has picked up. Improvements have been seen in areas such as exports, consumer spending, public investment and housing investment.

In the minutes for the Boj"s May meeting, policymakers acknowledged that the Japanese economy has picked up, but cautioned that uncertainly and downside risks remained. Meanwhile, some members raised the concern that it might be difficult for the BoJ to achieve the inflation target of 2%. At the meeting, policymakers decided to leave the policy rate unchanged at 0-0.1%, and adhered to conduct money market operations so as to raise the monetary base at an annual pace of about 60-70 trillion yen.

The RBNZ left the OCR unchanged at 2.5%. The accompanying statement and the MPS put the most focus on the housing market, and the strength in the NZD. Policymakers acknowledged that the global economic outlook remains 'mixed with disappointing data in Europe and some other countries, and more positive indicators in the United States and Japan' while domestic economy is 'picking up but remains uneven across sectors'. The NZD slipped after the announcement as investors had anticipated a less dovish statement and a lower forecast of the currency.