Japan back in focus on BoJ comments

While USD strength was the most dominant theme in FX markets, renewed yen weakness was also a mild driver of sentiment.

USD/JPY rallied to 103.13 overnight as the USD got a kick from the better-than-expected ISM manufacturing PMI data (57.3 versus 55.1). This was the fastest pace of US manufacturing growth since April 2011. A headline saying the BoJ is working on contingency plans for further economic stimulus set the tone for a weaker yen. Yesterday, BoJ Governor Kuroda also spoke and emphasised that the BoJ will continue to be aggressive until inflation is stable at 2%. Kuroda expects CPI to approach 2% in late FY14 or early FY15 and also said that there is a lag in the economic impact of currency changes. In addition, we already know the government is looking to unveil a fiscal package in the first half of December to counter the planned sales tax hike. All these factors have the ability to see the yen weaken significantly in the near term.

Key US data due out this week

With key US data such as the non-farm payrolls coming up, tapering will be the other main factor to consider for the pair. Data is limited on the Japan front this week but as long as US data continues to show the momentum that it has been showing recently, we should see the pair remain supported. The pair last traded above 103 in May, when it rallied to 103.74. That is now the next key level to look out for. When USD/JPY hit 103.74 in May, the Nikkei traded as high as 15,978 and we would expect it to slowly edge towards 16,000 in the near term.

AUD could be talked down further

While the yen crosses are looking interesting, AUD/USD will be one of the main pairs to focus on today ahead of retail sales, current account and the RBA. AUD/USD is just sitting on A$0.91, with traders refusing to commit to any direction; given the uncertainty around the statement. More than likely though, the RBA will want to take advantage of the current downtrend in the AUD to drive it even lower. Naturally, A$0.90 is the next key level ahead of August lows at A$0.8848. A situation whereby retail sales and current account data pushes the AUD higher would be ideal for selling the AUD on the back of the statement.

The retail sales report for October will shed light on how the handover from mining investment led growth to domestic demand led growth is progressing. Market is looking for retail sales to be up 0.4% and there could be room for disappointment here. Meanwhile current account data will help shape expectations on how Q3 GDP might look tomorrow.

USD/JPY

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