Sparked by fears that the BOJ took a step toward the monetary exit by reducing the amount of long-term bonds it is buying, there is an apparent scramble to cover previously sold yen positions. Th dollar finished last week near JPY113.00. It fell to about JPY112.35 yesterday, near the 50% retracement of the greenback’s bounce from the late-November lows near JPY110.85.  

The yen was bought in Asia earlier today and again in Europe. It has been pushed through JPY112, which has held over the past month, which also corresponds with a 61.8% retracement objective. The dollar broke through the 200-day moving average (~JPY111.70) in Europe. The next obvious technical area is the low from last November (~JPY110.85). We think that the scaling back of long-dated JGB purchases are not the signal of a new policy initiative (tapering) but the consequence of the shift from QQE to yield curve management. However, we recognize that it has provided the spark for position adjustments.

The bout of position adjustment was also sparked by the correction in the euro. The euro-yen cross seemed to by a common expression of conventional wisdom that the ECB was ahead of the BOJ and would remain so. The cross saw bearish price action before last weekend, warning of a near-term top. The euro has fell from JPY136 at the end of last week to JPY133.35 today. The break of JPY133.80 today risks triggering a move toward JPY132, the mid-December low.

Counter-intuitively, the yen’s surge has coincided with a backing up of US 10-year yields. The yield moved above 2.50% yesterday and is consolidating so far today. The rise in yields may have been spurred by the continuing rally in oil prices. The combination OPEC restraint, the dip in the US rig count, the decline in US inventories, unusually cold weather in large parts of the US, and geopolitical developments helped lift crude prices to three-three-year highs.

After the markets closed yesterday, API reported an 11.2 mln barrel drop in US oil inventories, which was almost three-times more than anticipated. It is the largest drop for this time of year in nearly two decades and stocks in Cushing fell below 50 mln barrels for the first time in three years. The EIA data due out today is regarded as more authoritative. The failure to confirm the API figures could spur some profit-taking.