A couple of factors triggered steep fall in Asian stocks today and send dollar and yen sharply higher. Firstly, markets are worried on the outlook of global recovery as Fed sounded dovish in its statement overnight and announced a 'modest' version of quantitative easing extension. Even though, US stocks managed to rebound after the release, they still ended in red. Secondly, Japanese Nikkei dropped sharply, by -2.7% on weakness in USD/JPY, which dragged down most yen crosses. The usual comments from FM yoshihiko Noda that yen's movement has been "a little bit one-sided" and the government will "closely monitor" the development were basically ignored by investors. Thirdly, growth data from China were also soft with fixed asset investment, retail sales, new loans and M2 money supply missing expectations. CPI jumped to 3.3% yoy instead. The data argued that the Chinese government will continue to lean against tightening considering the inflation outlook. EUR/USD and AUD/USD erased post FOMC rebound and resumed recent fall from 1.3330 and 0.9220. Yen crosses are also breaking out from recent tight range and building up momentum for deeper fall. The Fed announced to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-dated Treasuries as the 'pace of economic recovery is likely to be more modest in the near-term than had been anticipated'. This is the first step for the central bank to adopt unconventional monetary policies in more than a year and signaled policymakers' commitment to keep interest rates low and bolster the economy. Initial reaction appeared to be positive with Treasury prices rallying further. The market obviously expects further easing to come. More in Fed Sparks Unconventional Measures By Reinvesting MBS Proceeds. Main focus will now turn to BoE quarterly inflation report. Sterling's recent strength is built around optimism for H2 after the impressive Q2 GDP report. Hence, it will be important for Sterling that the QIR delivers messages that are inline with such optimism. However, there are uncertainty on how BoE will adjust the projections of 1.2% and 2.3% GDP growth in 2010 and 2011 based on the emergency budget plan as well as recent developments. CAD/JPY's fall extend further today on broad based strength in yen. Near term recovery should be finished and intraday bias remains on the downside for 81.58 support. As noted before, we're bearish bearish on CAD/JPY with 86.40 resistance intact. Decisive break of 81.58 will confirm that whole decline from 94.46 has resumed for 78.52/79.89 support zone, In spite of the sharp overnight retreat, dollar index managed to resume the rebound from 80.08 by taking out yesterday's high of 81.53. Intraday bias is back on the upside for 82.08/83/45 resistance zone. The overall outlook remains unchanged. Our preferred case is that fall form 88.70 is merely a correction to medium term rally from 74.19 and should be contained by 80 psychological level, ( 80.04 structure support as well as 61.8% retracement of 74.19 to 88.70 at 79.73). Hence, we won't be bearish as long as this level holds. However, break of 83.45 resistance is needed to sign reversal. Otherwise, we'll stay neutral and wait for confirmation, or invalidation of our view.

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