Yen Sharply Lower After BoJ, More Downside Ahead

The highly anticipated BoJ meeting was the main focus last week, and new governor Kuroda didn't disappoint. The currency was sold off broadly after the governor announced radical monetary easing overhaul. While the yen grabbed most of the attention, it should be noted that the strength in European majors was impressive towards the end of the week. Despite all the negative news out of eurozone, the euro staged a strong rebound as ECB president Draghi emphasized the determination to defend the currency. A string of weaker than expected economic data, including the ISM indices and NFP sent the greenback lower against European majors. Commodity currencies also weakened, partly on data and risk aversion.

Technically, yen's weakness was the clearest trend in the market last week, and that's expected to continue. Investor Soros indicated that if the Japanese realize that yen's decline is liable to continue, they will want to put the money abroad. The fall may "become like an avalanche". We'd prefer long yen crosses this week as the rally continues. The question is which yen cross is preferable.

While the USD/JPY was also strong, it seemed to have lost some momentum as European majors picked up strength on Friday. Technical pictures in EUR/USD, GBP/USD, USD/CHF don't warrant further weakness in the greenback yet. The dollar has been in positive correlation with U.S. stock indices recently. If Friday's sell-off in DOW is a sign of near term topping, the dollar should stay soft. In that case, commodity currencies would have no luck on risk aversion. Another factor to consider is that U.S. yield dived sharply last week, as 10 year yield dropped from the prior week's 1.852% to 1.694%. The 30 year yield was even worse, down from the prior week's 3.104% to 2.863%. This would also give the dollar a disadvantage.

Among European yen crosses, the EUR/JPY seemed a bit tricky. On the one hand, it seemed to have lagged behind as it is still limited by recent resistance of 127.70. On the other hand, it recorded the second highest gain over the week by 4.78%, just next to CHF/JPY's 4.98%. The EUR/GBP's recovery seemed to have lost steam last week. The near term outlook stays bearish with 0.8556 minor resistance intact. The EUR/CHF is close to 1.20/21 region where strong support is expected.

So considering all factors, we prefer to long GBP/JPY this week, and would probably add positions should it be able to sustain above 150 psychological level. We're looking at a take on 160 over the next few weeks should the trend continues.

Key economic data from the U.S. last week were disappointing. Non-farm payroll showed 88k growth in March, less than half the expectation of 190k. That's also the lowest number since June 2012. February's figure was revised up from 236k to 268k, but that wasn't enough to cover the miss in the March figure. Combined, Q1's total job growth was 504k, much lower than Q4's 626k. Unemployment rate, though, edged lower to 7.6%. ISM non-manufacturing index dropped from 56 to 54.4 in March. ISM manufacturing index dropped from 54.2 to 51.3 in March.

The ECB announced that the main refinancing rate would be left unchanged at 0.75%, and added no new unconventional monetary easing measures in April. The central bank expected the eurozone economy would recover later this year, but uncertainty remains. Policymakers pledged that in coming weeks, they would "monitor very closely all the incoming information on economic and monetary developments, and assess the impact on the outlook for price stability". They would stand "ready to act". Draghi's strong emphasis on keeping the euro is believed to be a key factor in driving the currency higher. He said that some people have "vastly underestimate what the euro means to the Europeans" and "vastly underestimated the amount of political capital that has been invested in the euro." He strongly stated that there is "no plan B".

BoE left rates unchanged at 0.5% as expected, and maintained the size of the asset purchase program at GBP 375b. Only a brief statement was released and focus will turn to minutes to be published on April 17.

The new BOJ board announced aggressive measures to combat deflation and boost the economy at the April meeting. Policymakers shifted the monetary policy target to the monetary base from the overnight call rate, pledging to double government bond holdings in 2 years. These moves have shocked the market, sending Nikkei +2% higher, but pressurizing the Japanese yen. These signal the BOJ’s determination to boost the economy and combat inflation. Some doubt exists whether these measures would be effective to produce significant results.

The Canadian job market contracted sharply by -54.5k in March, compared to an expectation of 9.0k. That more than offset February's growth of 50.7k; the total number for Q1 was -25.7k. This was the first quarter of contraction since Q2 of 2012. Unemployment rate also ticked higher to 7.2%, compared to an expectation of 7.1%.

The RBA left the cash rate unchanged at 3% in April. Policymakers stated that the current economic conditions justified leaving interest rates at a record low. The inflation outlook suggested that further easing is possible. Domestic economic growth was close to trend last year. However, the RBA restated that mining investment is peaking, and other demand sources are needed to sustain growth. The government has not commented on the job market, probably due to the lack of material change from the previous meeting. Overall, the tone for this meeting remained dovish and further easing is still likely.