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FX Daily Squawk
The US Dollar is somewhat mixed prior to today’s FOMC meeting. The new overnight high for the Euro failed to reach resistance of 1.4850. The Pound is aggressive against the US Dollar today, as all MPC members voted to increase the current asset purchase target to GBP200 billion. Some of the losses for the Pound have been recaptured, based on this news.
The US Dollar is gaining some ground against the Euro as the markets hinge on comments from the G-20 and today’s FOMC statement. The Fed will most likely use caution by not changing their previous statement that the Fed funds rate would remain at very low levels. Even if the assessment of the economy shows signs of improvement, they will want to avoid a double-dip by saying that things are starting to level out, as opposed to improving.
FX Daily Squawk
The world economy is gaining momentum, but there are some currencies that are suffering from an awkward and uneven recovery. Most of Europe and Great Brittain are a good example of that. In Germany, retail sales rose for the first time in three months. The German unemployment rate was unchanged and their manufacturing beat expectations. All of this suggests a faster recovery than other countries in the same region.
In the UK, although there have been some improvements in housing data, manufacturing fell lower than expectations, which is sending their currency lower. Due to the uneven nature of their recovery, they may need to reduce interest rates on reserves, to beow zero.
The Euro and the Sterling are not fairing well against the US Dollar this morning and it is once again showing us that the data still does not correlate with the currency movement. The alignment is off and the economic recovery is uneven.
The Aussie fell after their Reserve Bank left the cash rate unchanged at 3%. The issue is that they did not give a suggestion about a rate hike in the near future. The other problem is that we are seeing a slight reach for growth, as opposed to a strong rebound, as indicated by the greater than expected account deficit. Although their exports dropped, their manufacturing rose for the first time in fourteen months and building approvals rose more than twice that of expectations.
So in short, an uneven recovery is causing a price disturbance as the world currency markets try to find their way.
FX Daily Squawk
The Japanese Yen’s gain over the US Dollar has been attributed to month end positioning, as opposed to positive Japanese data. The UK market is closed for a holiday, but the Euro and Sterling continue to drop a bit.
The Japanese election over the weekend, with a change in party power, did not affect the US Dollar’s losses as much as you would think. Instead, month-end factors played a bigger role in the losses. Reports indicated that the opposition DJP won 308 seats in the 480-seat lower house, but that was largely expected and it had already been factored into the market. In any case, implementation of the new party’s agenda may prove to be difficult, since they do not have the 320 seat, two-thirds majority that would enable them to pass bills without support from othr parties. With the majority of the DJP party under 40 years of age, it will be interesting to see what kind of leadership and in what direction Japan will ultimately be pulled. The DJP agenda is to take back power from the bureaucrats and to free Japan from its dependence on exports. With a weak Japanese economy hanging in the ballads, that would be a difficult gesture to conjure up.
Although the Japanese Yen rarely responds to economic data, that may change soon, as the new regime continues to push for change that will affect global investors in Japan, as well as the production of global Japanese companies.
FX Daily Squawk
Most of the major currencies are fairing better than the US Dollar today. Yesterday’s run against the US Dollar, led to emerging currencies jumping on the rally wagon. European equity markets, which have rallied, may be a contributing factor for the move against the US Dollar, as well as better than expected UK GDP data. The Sterling and the Euro will most likely test resistance levels today.
World equity markets are stronger overall today. However, Asia was mixed, with the Hang Seng closing down, but the Nikkei closing up a bit.
FX Daily Squawk
Oct 8
Posted by John Taxiarchos
The new government of Japan is having difficulty with the aggressive nature of the Japanese Yen. It seems as though the finance minister, Fujii is looking to possibly intervene, rather than allow a strong Yen to continue. He has indicated that if the foreign exchange market is disorderly, there will be an official response. It is believed that he is talking about volatility. Actual volatility, which is the variance of the US Dollar vs. Japanese Yen exchange rate and implied volatility, which is reflected in current option prices. The exchange rate between the two is the lowest it has been in over a year and the implied volatility based on the 3-month benchmark is at the upper end of the previous month’s trading volume. Another issue is the pricing of risk-reversals and the parity of puts-calls in relation to the forwards. Then Bank of Japan has not intervened on the US Dollar-Japanese Yen since 2004. However, the pricing of risk-reversals was useful in anticipating intervention.Yen calls have for the most part, traded at a premium to Yen puts, due in part, to the role of Japanese corporate companies who wanted to protect foreign sales. The 3-month risk reversal is in favor of Yen calls by 3% today. This is in line with what has been seen over the past few weeks.
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