Dollar Correction Continues

Corrective forces continue to take hold of the foreign exchange market. It is long overdue and does not appear to be sparked by fundamental developments per se. Many short-term momentum participants had jumped aboard what had looked (and behaved) a one-way train. Late dollar longs were in weak hands, and once the momentum faltered, were squeezed out. 

However, the dollar pullback has been minor, so far. We suspect is may have a little more room to run, but anticipate a hawkish read to the FOMC minutes that will be released in tomorrow in the NY afternoon.

The $1.2700 area in the euro, just above the Friday-Monday high (~$1.2675) is the next immediate target. Sterling has bounced smartly off yesterday’s $1.5945 low to re-take the $1.61 handle, but has stopped in front of $1.6130, the main technical obstacle in the way of a push toward $1.6200. The dollar has been pushed marginally through its 20-day moving average (~JPY108.50) for the first time in nearly two months. Additional support is seen near last week’s low around JPY108.00. The Australian dollar extended yesterday’s gains to probe above $0.8800. Immediate resistance is pegged near $0.8830.

Both the Bank of Japan and the Reserve Bank of Australia concluded their meetings earlier today. There were no significant surprises, and both central banks kept policy on hold. The BOJ’s Kuroda continues to suggest that the recovery is intact but that the central bank is prepared to do more if necessary. He did not object to the yen’s weakness and commented that there was nothing “abnormal” about it as it reflected the divergent path of monetary policy.

Of note, a Bloomberg story indicated that a majority of the BOJ board favors shifting the inflation target from next April to the medium-term. The logic being that the date-specific target has fueled expectations, and that if the target appears unattainable (and a Bloomberg survey found 29 of 33 do not expect it to be met), then the BOJ will take additional measures (about half the Bloomberg survey respondents expect more action by April 2015).   If the BOJ does shift its “forward guidance”, it is not expected to be imminent.