JPY, EUR in the driver's seat

• USDJPY hits 106.50 technical target

• One in three economists expect RBA cut

• AUD in 'pivot zone' ahead of RBA meeting

Late trading Friday and early Monday saw the USD plunging to new lows within the G3 pairs as USDJPY had a look at the 106.50 technical target (38.2% of the rally from the all-time 2012 lows and approximate head and shoulders target) and then some and EURUSD saw its highest weekly close since early 2015.

Japanese intervention?

A US Treasury report out on Friday placed Japan, China, Korea, Taiwan, and Germany on the Treasury’s new watchlist for countries that may be engaging in unfair currency manipulation. The report describes explicit criteria for what constitutes unfair practices and how the US president must respond. Theoretically and somewhat ironically, the report indirectly allows about 2% of economic output in intervention per year because it names that as a threshold.

Some suggest, therefore, that Japan could intervene to the tune of $80-90 billion (about 2% of Japan’s GDP) if the JPY continues to strengthen. Adding to Japan’s woes, the Nikkei Manufacturing PMI for April out overnight was revised slightly higher, but remains at the lowest since the survey’s start in mid-2013.

Today is a bank holiday in the UK, and Tuesday through Thursday sees Japan off for the Golden Week series of holidays.

Forecasts divided on Aussie rates

A fresh Reuters poll says about one-third of polled analysts are looking for a rate cut from the Reserve Bank of Australia at tonight’s meeting, mostly on the dip in the Q1 inflation and despite the governor Glenn Stevens’ tendency to wax optimistic (and his clear preference for not taking rates lower from here).

Stevens had considerable success in talking the AUD lower beginning in the 2013 timeframe, but this was accompanied by a collapse in prices for the key commodities Australia exports to China and an accompany collapse in Australia’s mining industries.

With the recent commodity focus and strong resurgence in risk appetite, talk is cheap and interest rate moves are necessary to move the needle – ask the Reserve Bank of New Zealand. One wonders if the 2.00% level is also a tough psychological one for the RBA to break.

In any case, the large minority looking for a cut means that there is considerable two-way surprise potential on the back of the decision, where guidance is also very important, together with the actual rate decision.

No cut and a risk-on market could spell a sharp reversal back higher in AUDUSD, while a cut and risk-off would likely drive a sharp weakening in same. A mix of the two or a no-cut with clear dovish guidance could mean plenty of noise in the wake of the decision.

AUDUSD

The AUDUSD chart in a pivot zone as we await tonight’s RBA meeting, where a rate cut is potentially in play. The local reversal looks bearish but lacks confirmation and a full reversal of the prior rally wave from the 0.7500 area.

A close above 0.7700/50 and the bulls may be off and running again, while a fresh downdraft and close near 0.7500 or below suggests we go on to challenge the next support at the old range high just below 0.7400.

The G10 rundown

USD – Sentiment on the US dollar continues to ebb as the Federal Reserve is seen as being on hold and willing to let things “run hot” if necessary before looking at the next rate hike. The initial data this week also may not offer notable support, starting with today’s ISM Manufacturing. The payrolls data on Friday (and earnings, which will receive more focus if it surprises significantly either way) will be key data focus this week for USD traders.

EUR – Euro defaulting higher on the weak USD and the theme that central banks are at the end of their policy rope while Europe runs a large current account surplus. The big 1.1500 area looms as the key for EURUSD now that it has broken to new local highs.

JPY – Japan out on holiday for much of this week, but that doesn’t mean we should expect quiet in JPY crosses this week. The path remains open to further JPY strength on the theme of the Bank of Japan surrendering for now on further easing and risk appetite softening, but the fundamentals in the background are hardly supportive, as Japan’s economy looks soft.

GBP – Sterling is unloved again on the risk-off and JPY-strength tone of the last couple of trading sessions. Those will remain key influences, as well as whether those range highs in GBPUSD around 1.4670 remain intact.

CHF – An interesting push higher in EURCHF keeping our attention as we watch the next 1.1025 area for more. CHF proving entirely inconsistent in providing a safe-haven bid.

AUD – As discussed above, AUD in a pivot area. May be too early for the RBA to cut, but watch for any adjustments to guidance and the mood in commodities and risk appetite before seeing this as an unambiguous signal that a no-cut means AUD can sustain a rally.

CAD – The remarkable run lower in USDCAD has poked all the way to the 1.2500 level and could continue if oil gets back on the rally track, though some kind of consolidation move looks overdue, particularly if risk appetite continues to soften or the oil buyers blink.

NZD – Continues to strengthen, perhaps in part in AUDNZD on anticipation of a dovish RBA. Room for disappointment there, and in general room for NZD weakness from these levels, with NZDUSD traders focusing on whether the pair can sustain a 0.7000 break.

SEK – SEK a bit lost in the shuffle with the backdraft in risk appetite, which sees EURSEK threatening the top of the range toward 9.22. A strong-ish Swedish PMI keeps the pair below that resistance, but SEK could be susceptible to a squeeze if the risk off tone continues here.

NOK – Watching Norges Bank's Olsen out speaking today and direction in oil prices as trading has gone sideways here. The parity level in NOKSEK looks like an important technical trigger after a couple of recent tests.

Upcoming Economic Calendar Highlights (all times GMT)

• Euro Zone Apr. Final Markit Manufacturing PMI (0800)

• Euro Zone ECB’s Weidmann to Speak (0930)

• Norway Norges Bank Olsen to Speak (1110)

• US Fed’s Lockhart (non-voter) to Speak (1250)

• Canada Apr. RBC Manufacturing PMI (1330)

• US Apr. Final Markit Manufacturing PMI (1345)

• Eurozone ECB President Draghi to Speak (1400)

• US Apr. ISM Manufacturing (1400)

• Switzerland SNB’s Jordan to Speak (1630)

• Euro Zone ECB’s Lautenschlaeger to Speak (1700)

• US Fed’s Williams (non-voter) to Speak (2130)

• Australia Mar. Building Approvals (0130)

• China Apr. CaixinManufacturingPMI (0145)

• Australia RBA Cash Target (0430)