[LFX]

USD weakness continued, as dovish FOMC minutes detailing some members’ deflation fears suggest rates will stay low for an extended period. This is in contrast to the Fed’s comments last week which hinted that interest rates might increase earlier than expected upon recovery. Also adding to risk appetite were stronger retail sales and positive JP Morgan results. This risk appetite no longer
drives USDJPY in the way it used to, but yen crosses are still sensitive to it and strong buying has taken AUDJPY to new highs for the year, and EURJPY out of its 2-month downward channel. It is expected continued positive surprises from the US earning season, given the extremely low expectations, and this should continue to add to risk appetite. And while bond yields have not moved higher this week, they have not moved back lower either, relieving pressure on USDJPY.

[LFX]

EURJPY has moved higher in line with rising risk appetite on positive earnings surprises, retail sales and a dovish Fed. Higher equities, bond yields and commodities have all driven yen crosses higher and EURJPY is now toying with the top of the downward channel at 133.80. A break of this level on a daily closing price basis opens medium upside potential 142.00. EUR is likely to continue to benefit disproportionately from central bank diversification of FX reserves, and with Asia currently adding to reserves at estimated pace of close to USD100bn per month, that support is likely to remain significant. However while we expect risk appetite to remain supported as US earnings continue to beat low expectations, positioning in many currencies is now close to extremes. Post-earnings season, as we head into November and the last few weeks of active trading, it reasonable to expect a paring of risk positions.