Yen Edging Lower As G7 Accepts Depreciation

The Yen is edging lower as the week kicking off. The G7 meeting over the weekend signaled acceptance of depreciation in the Japanese currency, even though financial ministers pledged to monitor the BoJ's policies and the impact of yen's weakness on other currencies. German Finance Minister Wolfgang Schaeuble noted there was "a very intense discussion about Japan with our Japanese colleagues.” The U.K.'s Osborne stated that G7 leaders pledged not to manipulate currencies, saying that Japan's policies "impressed" delegates. The BoJ’s Haruhiko Kuroda reaffirmed the stance to meeting a 2% inflation target by 2015 thorough aggressive asset purchases as "easing will contribute to achieving our domestic objective of ending nearly 15 years of deflation", while Finance Minister Taro Aso said there was not "any opinion" on the yen's decline.

The dollar retreats mildly as markets digest last week's broad based rally. There has been increasing talk that Fed would exit from stimulus earlier than markets have priced in. This would remain a factor that supports the greenback. As noted in our weekly report, with major stock markets expecting to continue to make new record highs, funds are expected to flow back from bonds, commodities, and yen back to US and Europe. The U.S. dollar will have an upper hand for strength in DOW and S&P 500.

In a speech at a Chicago Fed banking conference, chairman Bernanke stated that "one of the key risks is how the system would respond to the failure of a broker-dealer or other major borrower". He also stated that "more work is needed to better prepare investors and other market participants to deal with the potential consequences of a default by a large participant in the repo market" and "possibility of a run" on money-market funds remains.

In the eurozone, ECB president Draghi said that the central bank is looking at a "variety of things" to boost lending to SMEs and ABS as an option. He noted that the ECB doesn't have a position on that yet. Meanwhile, German Finance Minister Schaeuble expressed his opposition, and said ECB purchase of ABS would infringe European rules.

On the data front, Australian home loans rose more than expected by 5.2% in March and NAB business confidence deteriorated to -2 in April. China industrial production rose less than expected by 9.3% yoy in April, fixed asset investment rose 20.6% yoy and retail sales rose 12.8% yoy. Main focus today is on U.S. retail sales, which is expected to drop -0.3% in April with ex-auto sales down -0.2%.

Latest CFTC data show speculator positions were generally unchanged on May 7, compared to April 30. Sharp deterioration was seen in Aussie positions and there were some improvements in Canadian dollar positions. Euro net short was relatively unchanged at -33.5k, compared to prior -30.1k. Sterling net shorts rose slightly to -63.1k, from prior -58.6k. Yen net shorts rose slightly to -78.5k, from +71.1k. Australia dollar net longs dropped sharply to 6.6k, from prior 30.2k, the lowest this year. Canadian dollar net shorts dropped quite sharply to -51.9k, from -67.8k.