The Japanese yen was once again the weakest currency last week as talk of delay in the next sales tax hike sparked another round of selloff. Sterling closely followed and was the second weakest one as dovish BoE Inflation Report drove out rates bets. Dollar was indeed the third weakest currency as recent up trend continued to lose momentum. Meanwhile, Kiwi, Aussie Loonie were the strongest ones. In other markets, DJIA and S&P 500 reached new record highs before retreating mildly but momentum started to weaken. 10 year yield and 30 year yield struggled in tight range and face some strong technical resistance. In commodities, while gold and crude oil extended recent down trend, they, in particular gold, might be gathering some support for a rebound.
Yen extended recent down trend to seven year low against dollar on talk that prime minister Shinzo Abe may call an early election to consolidate his mandate for maintaining the stimulus to the economy. In particular, he wanted to postpone the second planned sale tax hike next October to give the economy more breathing space. That was firstly seen as stock positive and drove Nikkei to as high as 17520, the highest intraday level since July 2007, before closing at 17490. Meanwhile, such a move would likely worsen the already bad fiscal health of Japan and thus was seen as yen negative. It's widely speculated that Abe would hold a press conference this week and formally announce his intentions and thus, yen would stay as a major focus this week. Also, Japan will release Q3 GDP figure on Monday and any bad number would solidify such expectations.
Sterling was knock downed by the dovish BoE inflation report. Policymakers trimmed the growth forecasts and forecast that inflation would slow further in coming months. While the employment data had shown signs of improvement, the central bank noted that the decline in the unemployment rate was mainly driven by the lower participation rate, rather than increase in payroll. More in Dovish BOE Inflation Report Sent GBP Lower. Markets were pricing that BoE would stand pat until at least October 2015. EUR/GBP once again rebounded strongly ahead of 0.7740/55 key support zone and a focus is whether the cross could gather further momentum to finally reverse the down trend.
Technically, we'd firstly point out that dollar continues to lose upside momentum last week. That was seen in bullish convergence condition in daily MACD in EUR/USD and AUD/USD, as well as bearish divergence condition in daily MACD in USD/CHF and USD/CAD. No key near term levels were broken yet but they started to look vulnerable. Attention will be on 1.2613 in EUR/USD and 0.9559 in USD/CHF this week. Dollar index did edge to new high of 88.26 but that's mainly due to strength in USD/JPY. We've mentioned before that the index is facing key long term resistance zone of 88.70/89.62. Based on current momentum, dollar index might have a consolidation first before finally giving this resistance zone a test. Focus is on 87.13 minor support this week and break will likely trigger a pull back to 55 days EMA (now at 85.41).
Another question for the week is whether Euro is ready for a rebound. The better than expected GDP report on Friday didn't trigger any immediate reaction but EUR/USD recovered strongly just before closing. Technically, only EUR/JPY is clearly bullish with the breach of 145.68 resistance indicating medium term up trend resumption. EUR/GBP is a possible candidate for reversal but it's still held below key resistance of 0.8065. EUR/CHF is another candidate for reversal as it's now close to SNB's 1.2 floor which could trigger intervention any time. However, EUR/AUD is pressing near term support level 1.4221 and was soft. EUR/CAD also stayed well inside medium term falling channel and was soft close to 1.4013 support. Overall, there is not much prospect for a broad based rebound in the common currency yet.
The commodity currencies seemed to have a upper hand against others. In particular, NZD/JPY surged to close at 91.85 last week, hitting the highest level since 2007. CAD/JPY jumped to close at 102.94, hitting the highest level since 2008. However, there is no confirmation of trend reversal in USD/CAD and NZD/USD yet. Similarly, while AUD/JPY was strong, AUD/USD is maintaining bearish outlook. Thus, we'll stay a bit cautious on the commodity currencies even though respective yen crosses could continue to benefit from carry trades.
Regarding trading strategies, we sold AUD/USD last week on break of 0.8642. But the subsequent fall lost momentum after hitting 0.8539 and AUD/USD then recovered. We'll stay short with stop at 0.88 but this one is looking rather vulnerable anyway. While yen remains a favorite to sell, it's a bit hard to decide which yen cross to buy. Except that, GBP/JPY is clearly the one to avoid. One might buy USD/JPY, EUR/JPY and CAD/JPY to hedge against the relative strength of each other. But we'd prefer to wait for another week to see if dollar would top in near term.