Yen Crosses Recovered As Global Stocks Pared Losses

The overnight rebound in U.S. stocks, with DOW up 180.85 pts, brought Asian markets broadly higher on Friday. The Nikkei rose over 340 pts at the time of writing, and pared some of this week's sharp losses. Yen crosses followed and recovered mildly, while the Aussie and Kiwi also strengthened slightly. The BoJ minutes for the May 21-22 meeting noted one member thought the difficulty to meet the inflation target within the time frame triggered speculation on more extreme measures from the BoJ, which "could cause financial imbalances". In response, several members argued that the current policy framework allows the BoJ "enough flexibility". Board member Kiuchi proposed to loosen the target by turning it from a two year target to a medium to long term goal, but was voted down by 8-1. The forecast on core consumer inflation was diverse, with members expecting 0.8% to 2.3% inflation in the year to March 2016. Median forecast was 1.9%.

The dollar remained soft last week; the dollar index extended the recent decline to as low as 80.59 on Thursday before recovering. The greenback has somewhat decoupled from stocks and yields. The DOW was merely stuck in range despite recent volatility, and was held comfortably above 55 days EMA so far, and defended 15000 on multiple attempt. The 10 year yield had made another 2013 high earlier in the week. Recent developments make the upcoming FOMC meeting significantly more important. Markets are somewhat worried that the Fed will taper the stimulus program, while the economy is not ready for self sustaining growth. Bernanke tried to convey the message that winding down the asset purchase doesn't meet a total exit, nor raising interest rates - but markets have not been listening. The Fed will probably tweak the accompany statement next week to adjust market expectations.

In the eurozone, ECB executive board member Mersch said underlying price pressure in the eurozone is "subdued", while recovery is "shallow" with "weak credit dynamics". Export growth would "benefit from recovery in global demand". He said that negative deposit rate may provide additional accommodation "theocratically" but there would be "possible caveats and unintended side effects" that may "run counter to the central bank's policy-easing intentions". And, "negative rates are in our bag of tools, but may or may not be deployed depending on the economic landscape."