FOREX TREND MONITOR: Major Currencies Diverge Vs US Dollar

By Ilya Spivak, Currency Strategist

Major Currencies vs. US Dollar (% change)

27 Dec 2010 – 31 Dec 2010

EURUSD : ECB PolicyMeeting, Periphery Debt Sales in Focus

The Euro all but shed its near-term links with risksentiment and relative yields. Indeed, the correlation betweenEURUSD and the MSCI World Stock Index has dropped to just 0.36while that with the EU – US 2-year Treasury yield spread (notshown) has withered to 0.34 on 20-day studies. The take-away seemsto be that developments surrounding the Euro Zone sovereign debt crisis are firmly in charge of the single currency.Interestingly, the problems within the currency no longer appear tobe weighing down investor confidence at large as swellingexpectations of a resurgent US economy boost risk appetite. Onbalance, this puts the onus on the monetary policy announcementfrom the European CentralBank as traders look to Jean-Claude Trichet andcompany for concrete ideas on how to squash the crisis. Before theannouncement however, the outcome of Portuguese andSpanish bond auction will set the tone, with poor uptake likely toweigh heavily on the single currency.

Source: Bloomberg

GBPUSD: Pound Eyes Bankof England Rate Decision, EZ Crisis

Monetary policy expectations remain in focusfor the British Pound as GBPUSD continues to track closely with thespread between UK and US 5-year Treasury yields. First andforemost, this puts the spotlight on the monetary policyannouncement from the Bank ofEngland . On balance, another non-even seems likely asthe central bank remains wedged between stubbornly high inflationand lingering uncertainty about the growth implicationsgovernment’s austerity program as its more painful elementskick in this month. As such, Mervyn King and company are likely todelay any policy adjustments at least until February when they canbe underpinned by updated quarterly inflation report. The Euro Zone debt crisis may also prove to bea significant catalyst if a rapid deterioration of investors’confidence in the single currency sees capital flee out ofEuro-denominated assets to seek shelter in Sterling as an alternative medium ofexchange.

Source: Bloomberg

USDJPY : US Data RemainsKey as Prices Track Bond Yields

US Treasuryyields remain most prominent in driving Japanese Yen price action, although it is interesting tonote that USDJPY the strongest correlation readings are shiftingdown the maturity spectrum. Put simply, whereas prices were closelytied with 2-year and 5-year yields in previous weeks, theserelationships have weakened while that with 30-year yields remainssignificant. On balance, the US economic calendar remains in focusas traders size up the pace of recovery in the world’s topeconomy to gauge the likelihood of the Federal Reserve ending thesecond round of quantitative easing (QE2) before its scheduledcompletion. Indeed, while the possibility of such an outcome seemedvirtually nil less than a week ago, last week’s revelationthat there exists a “threshold” for making changes to the program now has traders guessing. The Fed’s BeigeBook regional survey as well as Retail Sales , Trade Balance , Consumer PriceIndex , IndustrialProduction and UofM ConsumerConfidence figures are all on tap.

Source: Bloomberg

CAD , AUD,NZD : Comm Bloc FocusShifts to Rate Expectations

The AustralianDollar looks to have joined its Canadian and NewZealand counterparts in seeing the focus shift away from riskappetite toward interest rate expectations. This bodes ill for theantipodean currency as the floods inQueensland weigh on economi c growth andinterest rate hike forecasts alike . December’s Employment figures headline the economic calendar, withthe currency hoping to find some support in another decline in thejobless rate. Meanwhile, USDCAD and NZDUSD continue to look towardthe spread between December 2011 interest rate futures – agauge of where traders expect relative benchmark interest rateswill be in a year – to guide directional momentum. Withlittle of note on the domestic economic calendars, the spotlight islikely to fall on the US data docket.

Source: Bloomberg

Source: Bloomberg

Source: Bloomberg

For real time newsand analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/article/fundamental_trends_monitor/2011/01/11/FOREX_TREND_MONITOR_Major_Currencies_Diverge_vs_US_Dollar.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

More from Currencies

Markets Wobble as U.S. Readies More China Tariffs

Markets Wobble as U.S. Readies More China Tariffs

Watch These Two Crypto Experts Fiercely Debate the Future of Regulation

Watch These Two Crypto Experts Fiercely Debate the Future of Regulation

Bitcoin Today: Prices Attempt to Rally Following Early Weakness

Bitcoin Today: Prices Attempt to Rally Following Early Weakness

Ether Prices Rally After SEC Director Says He Doesn't Consider It a Security

Ether Prices Rally After SEC Director Says He Doesn't Consider It a Security

ECB's Mario Draghi Delivers a Masterclass in Monetary Policy

ECB's Mario Draghi Delivers a Masterclass in Monetary Policy