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Inflation and Interest Rates
There was a tick up in the euro zone composite PMI to 56.3 from 55.5 in December, but it has had little effect on the euro, as new session lows were recorded in late morning turnover in London. The emphasis on the euro’s recovery over the past two weeks, has been shifting interest rate expectations.
In the Wall Street Journal, the ECB President commented that higher commodity prices are not translating into wage increases. This means that he would have to overlook the temporary jump in inflation.
Forex News
Worries coming from the rest of the world that the US is being too onerous on its banks, which is somewhat affecting the currency markets. G7 did not come out with a concrete plan, but did say they will make sure that Greece will respond and begin to tackle its fiscal deficit.
EURUSD is going to trade higher today and would be a good buy. EURJPY is a good buy as well. USDCHF is in overbought territory and should be sold at this level.
FX Daily Squawk
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.
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.
Currency View for the Week
Jan 27
Posted by John Taxiarchos
The force that has been driving the US dollar thus far, shifts in inflation expectations and relative yield changes, will remain present for the rest of the week.
Euro zone CPI is expected to rise again this week. This could provide some momentum for the ECB meeting on Thursday. Further Euro gains may be attained if the CPI is in line with consensus.
The UK GDP instilled fear of a slowdown, as household spending and consumption remain weak. Weak housing data will cause a possible selloff. The Sterling will also be sensitive to the slowdown in Chinese PMI, which is expected to be moderate.
The Yen will continue to be the most sensitive currency on interest rate differentials versus the dollar, where strong US data prints this week may provide the dollar a break from January’s high near JPY84.00.
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