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Yen Recovers Some Overnight Setbacks; US Dollar Broadly Bid

The catalyst for the broad based US Dollar bullish reversal has certainly come from the Japanese intervention, but as we head into the North American open, it looks as though increased doubts over the success of the latest EU package and ongoing concerns over the health of the global macro economy continue to weigh on sentiment. Economic data released in Europe on Monday was far from strong, with German retail sales coming in much softer, Eurozone inflation and unemployment higher, and UK data also disappointing on the whole. Meanwhile, we have warned of the potential spread of the Eurozone fallout into other economies, and some softer data out from the relatively strong Norway could be warning of further broad based deterioration. Additionally, while Greek bond spreads have narrowed, it is well worth noting that other peripheral spreads continue to widen including Italy, Spain, and Belgium.

Since the Japanese intervention early Monday, The Yen has managed to recover into the North American open, with the currency making back more than a third of its +4% declines which resulted in a massive Usd/Jpy surge to 79.55. We believe that comments from bank of Japan’s Shirakawa have been influencing the resumption of Yen bids, after the central banker seemed to downplay the intervention from the Ministry of Finance and went as far as to discuss the merits of a stronger currency to the Japanese economy. Still, technically, we see good reason for the formation of a major Usd/Jpy base and will be looking for additional broad based Yen depreciation over the coming weeks and months.

What is even more interesting to us is the impact of this move on the US Dollar going forward. We believe that the potential elimination of the Yen as a viable safe-haven option following this latest intervention will now result in only one currency being able to benefit from any risk off flows in the markets going forward. The Swiss Franc was knocked out of the picture several weeks back when the SNB stepped in and declared that they would not allow their currency to continue to appreciate, and now Japan has done the same with the Yen. The US Dollar is therefore the only traditional safe haven currency left to trade into in risk off market environments and as such, we see the buck in a position to benefit greatly over the coming months while the global economy continues to try and sort itself out.

We are definitely relieved and pleased to see this type of broad based price action early Monday after having our core bullish US Dollar outlook tested in recent weeks. While we are far from out of the woods at this point, we contend that the US Dollar has finally put in the next key higher low ahead of a bullish resumption which eventually should result in a clearance of its early October highs against most currencies.

On Friday, we cited technical evidence that continued to support our core USD bullish outlook, with the Euro still looking quite bearish on the monthly chart and unable to clear the September highs despite a massive rally in October. At the same time, our convictions were seriously tested, and the market stalled just shy of those critical highs to barely keep our outlook intact. We used the broad USD sell-off to establish a major short position in Aud/Usd, and here too, our strategy was dangerously compromised after stops were narrowly averted in the previous week. Still, the market managed to stall out ahead of the September highs and did not close above our 1.0750 stop level, ahead of this latest major short-term reversal on Monday which has taken us back to our short entry by 1.0550. From here, we look for continued declines in Aud/Usd back below parity over the coming days.

Looking ahead, all eyes will be on Canada GDP data due at 12:30GMT, while in the US, Chicago PMIs and Dallas Fed manufacturing will also get attention. Another mover of price action and generator of volatility on Monday could come from month end flows. Overall, it will be a very busy week in the FX markets, with a slew of event risk due throughout, starting with the highly anticipated RBA rate decision out of Australia early Tuesday. The Fed will meet on Wednesday and then a new reign begins with Mr. Draghi heading up the ECB rate decision on Thursday. US equity futures and commodities are tracking a good deal lower into the North American open.