Good morning

Bank of Japan held rates unchanged overnight which saw USDJPY drop to below the psychologically important 109.00 level. This is on the backdrop of the comments made by Japan’s Prime Minister Shinzo Abe saying weaker yen can hurt small companies and households, which led the JPY to strengthen against the USD. We are likely to see the USDJPY trade between 108.00-110.00 which has been the range of the past few weeks.

ECB’s Draghi (last Thursday) refrained from action, but also refrained from giving us any details. A timetable for the ABS (Asset Backed Securities) was all we got, but with the absence of a size for the ABS and without a clear mention of QE, markets got the impression that Draghi is not ready to do more just yet and the EUR reacted by rising through 1.2600. However, not acting doesn’t mean resolving the situation, and the EUR’s gains faded after touching a high of 1.2660. Draghi speaks later in the week.

The Australian Bank rate remains at 2.50% (unchanged) once again and the Bank reiterated that a period of stability is “prudent”. Inflation is expected to be consistent with the Banks target. Regarding the AUDUSD, the RBA repeated its stance that the currency “remains high by historical standards” despite the fall in September. RBA Governor Glenn Stevens has a dilemma: the economy is slowing but the housing sector is booming. Concerning the latter, Stevens says that “dwelling prices have continued to rise over recent months”.  There has been no hint of rate hikes nor other tools to curb the rise in Australian home prices. Regarding the job market, the central bank noted that recent jobs data has been volatile given the recent rise of 121k in employment numbers. However, it will take some time before unemployment falls consistently. RBA painted a balanced picture and left the Bank rate unchanged.

It is important to note that NO specific headline caused the USD to sell off late European session yesterday, rather it was a case of profit taking and the “hangover” effect from Friday’s strong NFP number. Basically we are back at the levels seen Pre-NFP numbers and in my opinion this sell off was widely anticipated given the recent strong rally in the USD. The TREND IS STILL INTACT, the market simply taking a breather in preparation for the next leg in the USD’s rally.

The USD’s recent strength looks to be being tested as major levels show some reluctance in breaking. The 110.00 level in USDJPY was rejected again yesterday for the second time, this on the back of no major news flow. GBPUSD also recouped the 1.6000 level and EURUSD also improved following the USD sell off. But many are likely to see this move as temporary and a possible buying opportunity. While further dollar weakness is possible and a further squeeze of the USD bulls cannot be ruled out. We then have to ask the question, what economic or fundamental indicators/events could see a sustained sell off in the USD (especially given the fact that the FED is priming the market for a rate hike in early 2015).

USDRUB briefly broke the 40.00 level before retreating to 39.77 as the wider USD weakness also affected the RUB. The move remains significant as we have seen the RUB suffer its biggest quarterly drop since Russia’s economic crisis back in 1999. The crisis was further exacerbated by rumours of capital controls being initiated in response to the selloff of Russian assets (cash/stocks/bonds). What we do know is further restraint in Ukraine will go a long way to bringing things back to normality.

So for today we continue to watch the USD closely to see if there is a continued USD sell off. US Redbook and Chain Store sales later will go some way to reinforce the USD’s positive sentiment.

Good luck and have a good day