Yen Tumbled Before Month Close On BOJ Speculations

The yen's broad based weakness continued last week on the back of extended rally in risk markets as well as expectation of further stimulus from BoJ. US equities continued to make new record high with DOW hitting as high as 16174.51 while S&P 500 hit 1813.55. German DAX also hit new record high 9424.62. US treasuries attempted to stage a recovery during the markets but failed lacked follow through momentum. 10 year yield ended the week mildly lower at 2.741% while 30 year yield closed lower at 3.808%. No much development were seen in commodity markets with crude oil extending recent market towards 90 psychological level. Gold was soft in range around 1250 but there was no follow through selling below there. The Dollar index is still struggling in consolidative pattern around 55 days EMA and stayed above 80.50.

The Japanese currency had weakened nearly 6% against sterling in the month of November and over 4% against euro. Risk appetite provided no support to commodity currencies as Aussie, Canadian, and Kiwi were the next weakest currencies in the month. Indeed, Aussie has dropped over 5.5% against Sterling and around 3.5% against the dollar, euro, and swiss franc. European majors were all strong on robust economic data. While sterling was the strongest, it should also be noted that Euro was indeed very resilient considering the negative news of ECB easing as well as the Netherlands' downgrade.

An important development to know was that it seems markets are getting consensus that BoJ would be forced to ease policy further as otherwise, inflation will likely miss the 2% target by end of 2014. If was reported that nearly half of BoJ's board, including Sayuri Shirai, Takehiro Sato, Takahide Kiuchi, and Ryuzo Miyao are skeptical on meeting the target as scheduled. And there are already speculations that BoJ would launch additional easing measures in March meeting, also as a way to prevent the planned sales tax hike in April from derailing recovery. Selling momentum has accelerated in the month of November while invalidated our view of near term bottoming. But we'd stay cautious on whether the yen could bottom in near term.

The US economic data to be released this week would be important in determining the trend in yen. That include ISM indices and non-farm payroll. The general consensus on timing of Fed's tapering is still on March meeting but that could easily change with a batch of strong economic data this week. USD/JPY's rally lagged behind other yen crosses and was still limited below near term resistance at 103.73, partly due to recent retreat in treasury yields. Strong economic data could trigger adjustments in Fed expectations and send yields and USD/JPY higher. And, we'd possibly see another round of massive yen selling should the USD/JPY take out the 103.73 key resistance level decisively.

Technically, the recovery in the EUR/USD and the pull back in the USD/CHF looked corrective in nature. The GBP/USD was strong but is now pressing a key resistance level at 1.6380. Thus, we'd not suggest to sell dollar against European majors for the moment. On the other hand, there are indeed some more rooms for commodity currencies to weaken against the greenback in near term. That is, USD/CAD would likely have a take on 1.0656 resistance while the AUD/USD would likely have a test on 0.9 level. While the Japanese yen was weak, we'd hesitate to chase European yen crosses based on current overbought condition.

Our strategy of GBP/USD long was correct last week. However, as it's pressing 1.6380 key resistance now, we'd close out the position to take profit first. Instead we'll try to sell the AUD/USD for a short term trade first, but keep our stop tight at 0.92. Meanwhile, We'll wait and see if the EUR/USD would complete recent corrective rise from 1.3294. A break of 1.3520 support will trigger our short strategy this week.