By Ilya Spivak, Currency Strategist Major Currencies vs. US Dollar (% change) 17 Jan 201 1 – 21 Jan 201 1 EURUSD : Rates in Focus as ECB’s Trichet Talks Down Outlook Last week’s impressive Euro rally clearly looks to have owed to a parallel drop in credit-default swap (CDS) spreads from the currency bloc’s most debt-stricken periphery member states (the so-called PIIGS, meaning Portugal, Ireland, Italy, Greece and Spain). However, barring any unforeseen developments, the absence of scheduled event risk on the sovereign stress front this week may bring the monetary policy outlook back into focus. On balance, this seems to bode ill for the single currency after ECB President Jean-Claude Trichet backed off from the hawkish rhetoric accompanying the bank’s latest rate decision in an interview with the Wall Street Journal over the weekend. Preliminary German Consumer Price Index figures stand out on the economic calendar. Euro Zone Consumer Confidence and M3 Money Supply figures are also on tap. Source: Bloomberg GBPUSD: All Eyes on Bank of England Minutes for Policy Clues Monetary policy expectations remain in focus as GBPUSD continues to track closely with the UK - US Treasury yield spread. This puts the spotlight on the Bank of England as it publishes minutes from January’s MPC meeting. The dramatic build in priced-in rate hike expectations for the year ahead (as tracked by Credit Suisse) suggests traders see the bank as likely to err on the side of price stability, stepping off the sidelines to raise rates as inflation continues to rise despite the threat that such action would pose to the nascent economic recovery, particularly as the government’s austerity program gains momentum . Indeed, the central bank argued throughout 2010 that inflationary pressure was temporary and would subside over the medium term without tightening. Clearly, this has proven wrong, hinting that putting off the issue for much longer threatens to become a credibility problem. A relatively robust fourth-quarter Gross Domestic Product reading will only add to the anticipation, with the annual growth rate set to print above its long-run average despite a shallow downtick from the p rior period. With that in mind, traders will be keen to parse the meeting minutes for any clues on policymakers’ thinking ahead of February’s MPC sit-down, an event made all the more important given it coincides with the unveiling of an updated quarterly inflation forecast. Source: Bloomberg USDJPY : Spotlight Stays on US Yields, FOMC and US GDP on Tap US Treasury yields remain most prominent in driving Japanese Yen price action, putting the spotlight squarely on the busy US economic calendar. Needless to say, the Federal Reserve monetary policy announcement and the preliminary fourth-quarter Gross Domestic Product reading stand out as top-tier event risk. For the former, traders will be most concerned with quantifying policymakers’ “threshold” for reducing or even suspending the second round of quantitative easing before its scheduled completion after hints at the existence of such a barrier suddenly emerged in Fed officials’ comments over recent weeks. Policymakers’ voting pattern ought to prove significant as well as five regional Fed presidents – including the hawkish Charles Plosser and Richard Fisher – will rotate into active positions on the rate-setting FOMC. Meanwhile, the GDP is set to show the annualized growth rate jumped to 3.5 percent, the highest in three quarters. Better yet, the outcome is expected to driven by the most robust pickup in private consumption in four years. This coupled with forecasts calling for stronger readings on Consumer Confidence , New Home Sales , and Durable Goods Orders promise to push US yields higher, taking USDJPY along for the ride. Source: Bloomberg USDCAD : US Economic, Earnings Calendars to Guide Price Action After last week’s Bank of Canada rate decision deflated the markets’ robust rate hike expectations , the focus seems to have turned to the accelerating recovery in the US, with USDCAD swiftly rebuilding its correlation with the S&P 500 benchmark equity index. This makes sense: Canada sells over 80 percent of its exports to its northern neighbor, making a recovery at home very much contingent on what happens in the States. This puts the onus on the aforementioned US data docket as well as a busy earnings calendar, with 128 S&P 500 companies set to report results this week. Source: Bloomberg AUD USD : Gold Correlation Hints Aussie Weakness to Continue The Aussie’ s bearings are best revealed via its clear correlation with gold prices , with the high yielder likely to continue follow ing the yellow metal lower as investors’ dominant forecast for the evolution of the global recovery shift s away bullish and bearish extremes. Gold had thrived on the back of its appeal as a store of value for bulls and bears alike , with the former camp calling for runaway inflation courtesy of ultra-loose monetary policies while the latter projected renewed collapse as fiscal stimulus expired. However, investment demand suffered a major setback, with gold ETF holdings dropping precipitously over re cent weeks. The reversal seems to owe to the combination of improving US economic data , rising sovereign stress in Europe and looming slowdown in China amounting to an environment where a back-slide into recession looks unlikely while pointing to a slow and uneven recovery over the years ahead. T he increasingly apparent shift in the markets’ consensus toward this scenario bodes ill for the Aussie much the same as it does for gold. Indeed, a protracted recovery hints that major central banks will now get their chance to catch up as the RBA – until recently the leader in post-crisis monetary policy normalization – as Glenn Stevens and company look increasingly likely to sit on their han ds for much of the coming year. The fourth-quarter Consumer Price Index report headlines local event risk. Source: Bloomberg NZDUSD : RBNZ Rate Decision to Yield Familiar, Dovish Outcome The rising link between NZDUSD and yield spreads puts the spotlight squarely the Reserve Bank of New Zealand. The result may yet prove to carry little weight however after last week’s disappointing inflation report and pointedly dovish comments from Prime Minister John Key seemingly dashed any reason to suspect the central bank would abandon its accommodative posture. Source: Bloomberg For real time news and analysis, please visit http://www.dailyfx.com/real_time_news To receive future articles by email, please contact Ilya at firstname.lastname@example.org
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