There was no relief in sight for JPY shorts on Friday as the market squeezed mercilessly all the way to the close of the US session and USD/JPY and EUR/JPY posted impressive new lows. But the Asian Monday session shows that the action was a bit overdone in the short term, as USD/JPY opened half a figure higher, and EUR/JPY also opened well of its lows. Still, the damage appears done on the JPY charts, as especially EUR/JPY (and other JPY crosses) may be starting a big new bear move. The strategic target for EUR/JPY is coming in at 125.00 if the pair stays below 137.50.
A combination of other factors are making it likely that the JPY strength will continue here, even if it proves a bit overbought in the short term. Those factors include:
  • The prospect of brighter US data ahead after both the Philadelphia Fed and Chicago PMI figures handily beat expectations. This sets up the possibility of an upside surprise in the ISM Manufacturing number today
  • Potential rally in stock markets after Friday's reversal. The JPY tends to do well when stocks do well.
  • The big sell-off in Energy Markets
  • The continued speculation that China is in the process of moving on the Yuan revaluation.

The question in all of this is: Where does that leave the USD - especially vs. EUR? This is a difficult one to answer, as many of the above factors also favor the USD with the exception of the Chinese revaluation story, which is USD/JPY bearish. So this leaves us with perhaps three scenarios on the EUR/USD:

Scenario 1:

-EUR/JPY is the dominant focus in the revaluation story, and
-US stock markets rally strongly while
-fixed income sells off heavily.
EUR/USD breaks below 1.2740 and heads toward 1.2500

Scenario 2:

as the revaluation story develops, USD/JPY comes under the most pressure as the Asian central banks slow their rate of USD buying in general
this keeps EUR/USD in the 1.2750 to 1.31 range

Scenario 3:

The market has gotten way ahead of itself on the speculation about the Chinese revaluation and much of the EUR selling is in over-anticipation of a French no-vote at the EU Constitution referendum in late May.
The JPY pressure eases
EUR/USD is able to pick itself up off the mat and rally to higher resistance.
I favor scenario 3 somewhat, as I think the market's Euro pessimism and Chinese reval speculation are way overdone in the short term. The key sign that the USD may weaken will be any sign of weakness despite solid data and/or despite a sell-off in US Treasuries.

This week could be a key one for the next couple of months.