Yen Weakened Broadly On Risk Appetite, Dollar Mixed Against Other Majors

The financial markets were rather mixed last week. A major question is whether markets are pricing in stimulus withdrawal from Fed sooner than March 2014? The answer was not clear. On the one hand, equities surged to new record high, with the Dow breaking through 16000 psychological level to close at 16064.77. The S&P 500 also broke through 1800 psychological level to close at 1804.84. The Dollar index closed the week mildly lower at 80.647. But we saw the EUR/USD back above 1.35 while the USD/CHF was below 0.91. It seemed that markets thought Fed's stimulus was to stay. But then, 30 year yield jumped to new 2013 high at 3.938% before closing at 3.838%, ended the week mildly higher. The 10-year yield also strengthened to as high as 2.839% before closing at 2.752%. The USD/JPY jumped sharply to close above 101 level. And these argued that The Fed would start tapering soon. These messages are rather conflicting.

The FOMC minutes suggested that the Fed could taper the asset purchase in coming months. But, recent comments from key Fed officials remained rather dovish. Fed chairman Bernanke said that the Fed would, "maintaining highly accommodative policies for as long as they are needed" and rates could remain low "perhaps well after" unemployment rate drops below the 6.5% threshold. Fed chairman nominee Yellen said last week in the confirmation hearing that, "it's important not to remove support, especially when the recovery is fragile". There remained a lot of uncertainties in the Fed's path and would be highly dependent on incoming data. The Senate Banking Committee voted 14-8 to approve Yellen's nomination as the next Fed chairman. Next would be a final confirmation vote in the full Senate after Thanksgiving."

Elsewhere, the euro was pressured on talk about negative interest rates but regained strength after ECB president Draghi said there was no news regarding the issue. The BOE minutes for the November meeting affirmed that the UK economy was undergoing a sustainable recovery. Yet, policymakers were uncertain about the outlook after the end of this year. The BoJ left policies unchanged with interest rate kept at near zero level while the target for monetary base expansion was held at JPY 60-70T a year. The Aussie was pressured as RBA Stevens said he's "open-minded" on intervention to curb the currency's strength. The Canadian dollar dropped after tamer than expected inflation data.

Technically, the yen was the weakest currency last week. The strong break of 163.05 resistance in the GBP/JPY suggests that the yen's selloff could be regaining momentum again. We'd expect the yen to remain weak in near term, at least till the EUR/JPY have a take on 140 psychological level and the USD/JPY takes on 103 resistance zone. The Aussie was the second weakest currency in spite of strong risk market rally. The AUD/USD would likely extend recent fall towards 0.9 psychological level and below as the Australian dollar stay pressured in crosses. The USD/CAD's break of the near term falling trend line suggests that it's building up side momentum for 1.0608 resistance and above. The break of 0.9078 minor support in the USD/CHF argues that the greenback would weaker further against European majors in near term.

Overall, while commodity currencies would likely remain pressured in near term, we'd remain skeptical on it as downside potential could be limited by strength in risk markets. So, we'd avoid commodity currencies. The yen would stay weak and could be short for near term trades. But that, we're cautious on rebound in the yen as the EUR/JPY hits 140 and the USD/JPY hits 103. So, we're prefer to avoid the yen for the moment. Last week's strategy of the GBP/USD long was correct even though it's not the most profitable trade on board. We'll hold on to the GBP/USD long as the EUR/GBP is mildly bearish and expect a break of 1.6259 resistance.