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Currencies consolidate ahead of BOJ meeting

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Currencies consolidate ahead of BOJ meeting

Currency markets consolidated on Monday, as traders attempted to absorb the data released last week. Strong PMI data globally was slightly offset by Friday’s weaker than expected US non-farm payroll report.  This week traders will likely focus on the BOJ interest rate meeting which is scheduled to be released on Wednesday.

Capital markets will continue to keep a close eye on the Federal Reserve as the tapering of FOMC bond purchases will likely change the dynamic in the currency market.  Tapering will increase US yields which will spill over into a stronger US dollar. Reuters published a poll over the weekend, which showed that primary dealers have moved out their expectations of when the Federal Reserve will begin to taper its bond purchases.  The August poll showed that more dealers believe tapering will start in October as opposed to September and that the average tapering amount will be reduced from 20 billion to 15 billion.

The Bank of Japan will likely take center stage this week, as additional bond purchases could be in the cards. The Japanese government recently increased its growth forecast for the year to 2.8% from 2.5%.  The retail sales tax is the impetus for the increase in sales but it will also boost inflation as the CPI is expected to increase to 3.2%.

Speculative positions by hedge fund during the past week were mixed. The net speculative short positions in currency futures were reduced except the Australian dollar.  The net short euro and Swiss franc positions are poised to switch to being net long. According to the commitment of traders report, the gross long currency positions rose, except the Japanese yen.  Gross short positions were reduced, with the exception for a small 1k contracts in sterling.  The main exception was the Australian dollar, where the gross shorts rose by 10.5k contracts.

The Yen is consolidating with the RSI (relative strength index) printing near 47 which is in the middle of the neutral range.

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