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
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