Yen Bottomed In Near Term On Global Equities Selloff

Global equity markets were sold off sharply during the latter part of last week on expectations that the Fed would taper the open-ended asset purchase program. The MSCI world index dropped to 1492.7 compared to the prior week's close of 1512.9, down -1.3%. DOW jumped to a new record intraday high of 15542.4 before closing at 15303.1, down for the week slightly by -0.4%. The Nikkei was the worst performer among major markets and closed at 14612.45, down -3.5% from the prior week's close. More drastically, it was down over -1300pts from intraweek high of 15942.6. In the currency markets, the yen was the strongest performer, followed by swiss franc on risk aversion. Aussie and Loonie were the worst performers. Meanwhile, the dollar was mixed even though it was also down against the euro and Kiwi.


Technically, the sharp pull back in yen crosses should confirm short term topping. That is, the yen should have bottomed in near term. Some consolidations could be seen in near term, but there is no confirmation of trend reversal yet. A further rise is still expected in yen crosses in general after completing the current consolidations. However, we need to point out divergence conditions in the daily MACD in the USD/JPY and EUR/JPY. Also, both pairs are likely in the fifth wave of a medium term five-wave sequence. That is, while a further rally in the USD/JPY and EUR/JPY is expected, the upside might be limited and we're starting to anticipate a medium term reversal.

Secondly, the USD/CAD and AUD/USD are both showing increasing momentum. While the dollar was mixed, both Loonie and Aussie have been weak. Indeed, the USD/CAD's break of 1.0341 resistance should have confirmed resumption of medium term rally. It's also starting to look likely for the AUD/USD to drop through the 0.9588 support. Thirdly, the outlook in the EUR/USD and GBP/USD stayed bearish in spite of recovery towards the end of the week. Nonetheless, the bullish outlook in the USD/CHF is starting to look shaky. Note that while the DOW retreated sharply, there was no sign of reversal and the index is possibly just in consolidations after being overbought in prior rally.

Our strategy for the USD/JPY long was incorrect, as the pair pulled back sharply after hitting 103.73 and closed the week lower. Meanwhile, the strategy on USD/CAD long was correct. Considering the above analysis, we'll stay long in USD/JPY for another week but would get out of the position in the event of a new high above 103.73. We'll also stay long in USD/CAD. In the event of recovery, we'll try to short AUD/USD for deeper medium term fall ahead.

Speculations over Fed's tapering of QE heightened after Chairman Bernanke's testimony to the Joint Economic Committee of Congress. While acknowledging improvements in economic activities and the job markets, downside risks remained. Yet, the chairman noted that if economic data can give policymakers confidence that growth would continue and is sustainable, consideration of early reduction of asset purchases would be made. The chairman, however, affirmed the central bank would not taper QE prematurely. The FOMC minutes for the May meeting appeared less dovish but did not send additional message.

The BOE minutes unveiled that all 9 MPC members voted for keeping the Bank rate unchanged at 0.5%, a record low since March 2009. Yet, 3 mebers, including Mervyn King, voted for expanding the asset purchases program by 25B pound to 400B pound. As the U.K.'s economic recovery remains fragile, it is expected that the central bank would need to expand asset purchases further later this year.

The RBA released minutes for the May monetary policy meeting, explaining the rate cut to 2.75% on May 7. The minutes signaled that policymakers retained a dovish bias, and it is likely for the central bank to cut the cash rate again if the economic outlook deteriorates. The Australian dollar dropped against the U.S. dollar after the report, after making the biggest gain in 2 months yesterday.