Well if we're going down, we might as well go down in style. Our short AUDJPY position was beginning to work at last night's Tokyo opening. But then at around 8 PM EST USDJPY exploded higher bringing AUDJPY, and the rest of the Yen crosses, higher in a historic BOJ intervention. For the first time since 2004 the Bank of Japan in a unilateral effort aggressively sold Yen, bought Dollars to stem the Yen's aggressive appreciation. There are several possible explanations of the cause and timing of the central bank's aggressive move. First, the election of Prime Minister Kan as the DPJ leader some 3 months ago was based on the platform that currency market intervention was not on the agenda, contrary to his predecessor Ichiro Ozawa who supported intervention to support growth. Much to the market's suprise, he is quickly conforming to the status quo of currency management. Second, is the outlook for QE2 from the Fed and the impact on US/JGB yield spreads. The fact that US bond yields have been so weak as longer-term US treasuries are bid up ahead of the expected announcement of QE2 reducing the US yield spread advantage. As US yields fall relative to their Japanese counterparts, there is less incentive for Japanese to sell yen to buy dollars - this will only further pressure the USDJPY exchange rate.
Talking specifically about the US 10 yr yield as it relates to the timing of the BOJ to intervene, I can't help but think the US 10 yr's inability to rally above that 2.8% resistance level we have been focusing on, as well as the subsequent sell-off, had something to do with the timing. Is there more behind it? Probably, but I am not going to sit around long USDJPY waiting for the BOJ to intervene while the S&P remains below our key 1130 triangle resistance, as the US 10 yr yield rally looks convincingly corrective in nature.
So we were stopped out of AUDJPY to put us slightly in the negative half way through the month. I look forward to battling back into the black. To do so I will continue to focus on the Euro and Dollar story, which will continue to lag both the risk-on trade as well as the pure weak USD story on the outlook of QE2. EURUSD should find support at around 1.2950 with upside targets of 1.3100 and 1.3175. I fully expect this to form a very tradable high for a resumption of the dollar bull trend. How can you still be bullish dollar with an extra 1 trillion in liquidity in the pipeline, you ask? I would like to pose an open-ended question to you. The first edition of quantitative easing was accompanied by escalated fears of inflation and a severally devalued currency. The actual result was exactly the opposite of expectations as disinflationary, and soon to be deflationary forces, strengthened the US currency. With default of some periphery Euro zone countries one failed bond auction away, German data slowing, and the commodity currencies of the world lacking the liquidity required to assume the reserve status, what makes you think this time will be any different?
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