Clearly the market got a bit upset by the lack of hints from the BoJ on easing in the coming months and we’ve seen strong short covering in the JPY. With the flush out of shorts from those positioned for a dovish narrative from Mr Kuroda, it looks as though we have come to an inflection point. Given tonight’s FOMC minutes are likely to be a hawkish affair (and thus USD positive) the pair could be a good long from here, especially after the strong support seen on the trend drawn from the February 4 low at 101.50. However, upside seems limited at the moment.
I pointed this pair out yesterday and the pair has now broken trend support drawn from the 2011 low. The 9-day RSI is oversold now (at 20), so the chance of short covering is high. I would wait for covering to materialise and sell any rejection of the former uptrend.
The lack of volatility in the FX market is not only helping the really high yield emerging market pairs, but also putting a further bid in the AUD, CAD and NZD (or bloc currencies). AUD/USD has broken the 61.8% retracement of the October to January sell-off at 0.9339, and whilst it is starting to get overbought, it could be eyeing the November 20 high of 0.9447 over the coming weeks. Shorting is ill advised and even though a pullback could happen soon, this looks likely to be shallow and well supported. It’s worth remembering that Korean exports (released last week) grew 5.2% and they are a really useful guide to China’s exports, as the correlation over the years is strong. The key risk to AUD longs here is the Fed minutes at 4am AEST. Last month the FOMC statement was hawkish and given the recent pullback in the USD, it seems the market has got fairly bearish, so bear this in mind if long.
It looks as though we are going to see better days here in Australia, although the Nikkei looks set to be sold off fairly aggressively on open. The ASX 200 has a strong intra-day correlation with the Nikkei so this could hold the index back a touch. Look for material names to outperform, especially if China performs as well as it did yesterday.