FOREX TRADING

Discount Rate Discussions Keeping Floor Under Bonds

Once again bond markets are having a hard time maintaining a rally after the Fed’s earlier stand on its policy of maintaining low interest rates. Dealers continue to mull the potential for a second nudge higher in the Fed’s discount rate, which is overhanging market sentiment. As much as investors want to see a continuation of near-zero interest rates the threat of increases at the Fed’s symbolic rate serves to remind fixed income investors that benchmark interest rates may not be going up today, but that’s the general direction at some unspecified point. The relief rally in the Eurozone that’s helped push yields towards record lows also appears to be running tired of the story that Greek woes will splinter the Eurozone.

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USD Higher, Consumer Prices Flat, Continuing Claims Rise

• USD: Higher, Greek fiscal worries and tensions with China over Yuan revaluation, Philly Fed rises
• JPY: Mixed, manufacturing sentiment improves, gains limited as US equities rally
• EUR: Lower, Greece may seek IMF aid as EU aid to Greece appears less likely
• GBP: Lower, February budget deficit smaller than expected, CBI orders decline
• CAD and AUD: AUD & CAD lower, Canadian net foreign investment flows rise

Overview

The USD traded higher Thursday supported by concern about the Greek fiscal outlook and in reaction to increasing tensions between the US and China over the value of the Yuan. EUR was pressured by a Dow Jones report that Greece may seek IMF aid as aid from the EU seems less likely. Greek PM says it will give the EU one month to decide on an aid plan. US officials tell China that the value of the Yuan is a real concern. There is a movement in U.S. Congress to name China as a currency manipulator. Chinese officials continue to push back against pressure to revalue the Yuan and state that a rise in the Yuan would be a disaster for Chinese exports. US and Chinese rift over the Yuan dampens risk appetite and sparked selling of the commodity currencies. CAD outperformed supported by report of strong net foreign investment flows to Canada and diminished threat of BOC intervention. JPY traded higher in reaction to today’s drop in risk appetite and by report of improving manufacturing sentiment in Japan. GBP traded lower in reaction to a decline in UK CBI orders with downside limited by report of smaller than expected UK February budget deficit. Today’s US economic data was mixed with February CPI unchanged and jobless claims came in slightly higher than expected. Continuing claims unexpectedly rose by 12k. The US current account deficit widened by less than expected in the fourth quarter. LEI was reported a bit weaker than expected and the Philly Fed came in above expectation. Today’s US economic data points to a slow US recovery with low inflation and USD consolidated early gains.

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Time to Regroup

Wednesday’s forex activity was notable for two things: The dollar weakened as risk appetite accelerated sending riskier asset classes and currencies to multi-month peaks. The euro failed to join the party closing down on the day. It should, like a strong derby favorite, have taken up the early running, but we all quickly noticed how hobbled it looked resting at the back of the pack. Sure enough we find today that the questions are starting to arise about the very existence of a financial rescue package for Greece in the event it can’t roll over spring bond maturities over the next two months. Overnight developments leave us with the mental imagery of politicians in Berlin holding up traffic signs emblazoned with the words, "U-turn here for IMF building."

Euro – We have become accustomed to hearing little substantive in the aftermath of EU ministerial meetings at which defense plans were supposedly discussed. Any press conferences or statements have been confined to merely stating facts surrounding the need for Greece to get its own house in order coupled with strong supportive words from fellow nations. However, the words yesterday from Germany’s chief finance minister telling Greece to pay a visit to the IMF if it feels the need for financial assistance is a real deviation from the previous script. It also leaves Chancellor Merkel treading a fine line between standing behind Greece and actual facing up to the nation as an opponent.

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Risk-Aversion Drags Euro Lower

The dollar and yen were higher in early Thursday trading amid speculation that Greece may seek help from the IMF — sparking fears that next week’s EU Summit meeting will provide little support to the sovereign-debt crisis. Heightened risk aversion pushed the euro lower, relinquishing the 1.37-handle against the dollar and sliding beneath the 123-level versus the yen. Gains in crude oil stalled in the overnight session, drifting back toward the $82-per barrel level and lower by almost 1% to $82.16.

Data from the US will remain in focus in the New York session with the calendar consisting of several key gauges on the economy. The reports include February consumer prices, weekly jobless claims, the Q4 current account deficit, the March Philadelphia Fed survey and the February index of leading economic indicators.

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USD Lower, Inflation Subdued

• USD: Lower, PPI falls the most in seven months, steady Fed policy
• JPY: Lower, BOJ expands quantitative ease and raised its lending auctions to ¥20trln
• EUR: Lower, annual rate of labor cost rise the slowest in four years
• GBP: Higher, UK claimant count posts biggest drop in 13 years, BOE minutes note increased inflation risk
• CAD and AUD: AUD & CAD higher, strong Australian housing data, easy money from the Fed and BOJ

Overview

The USD traded mostly lower Thursday pressured by the Fed’s decision to hold monetary policy steady and signal that interest rates will remain low for an extended period. GBP surged in reaction to report that UK jobless claims declined the most in 13 years. GBP was also supported by the minutes from the BOE’s March policy meeting which state that the central bank is growing more concerned about inflation risk. EUR traded lower with gains limited by report of slowing rise of labor costs in the EU and selling pressure in cross to the GBP. The commodity currencies traded higher in reaction to firmer equity market trade with the AUD supported by hawkish comments from the RBA’s Debelle and strong Australian housing. Debelle said rates may have to rise a bit more. CAD was supported by report of a surge in Canada’s whole sale trade. JPY traded lower in reaction to the BOJ’s decision to expand quantitative ease from ¥10trln to ¥20trln. Today’s US economic data was mixed with PPI posting a bigger than expected decline. The PPI report supports the Feds forecast that US inflation pressures will likely remain subdued. With the US economic recovery uneven and inflation subdued the Fed will be in no hurry to tighten monetary policy. Focus turns to Thursday’s release of US CPI.

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Overbought Test Of Resolve

Gbp/Usd moved 100 pips higher during the European session after reports from the U.K. labor market hit the newswires that were better than expected. The minutes from the recent Bank of England rate meeting revealed that nothing much had changed from the previous month, and that CPI and inflation reads were as much to do with a weaker pound than instigated by internal growth.

The MPC minutes suggest that interest rate increases are just as far away in the U.K. as any other major region, with the exception of Australia. This news had a positive effect on the major currencies, but the pound is the only pair to make a substantial breakout. (more…)

FOMC: Less Dovish, but Hikes Remain Distant

• No change to policy measures. Hoenig repeats his lone dissent.
• Growth language slightly more optimistic but no change to inflation outlook
• ‘Extended period’ retained indicating continued commitment to low rates
• Further asset purchases highly unlikely
• No change to our outlook expecting unchanged rates until late this year

Details

The assessment of activity was slightly more upbeat than in the previous statement. As expected the FOMC turned more optimistic on the labour market while on the other hand noting recent very weak housing data. Generally, the committee still expects a moderate recovery including a gradual return to higher resource utilisation. As a result, the outlook remains 3-3.5% growth, a relatively moderate rate historically.

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Markets Brace For FOMC Decision – USD Firmer

Asian equity markets were mixed after a late session rally leveled off a lackluster day in the US with the Dow up 17.46 points, closing at 10642.15. Financials rallied late in the day after Senator Dodd’s proposed financial regulatory overhaul gained some momentum. Traders are cautious ahead of the FOMC rate decision at 2:15pm in New York today. Although no change is expected, analysts will be once again paying close attention to the language used in the Fed’s statement as well as the number of dissenters. Investors are looking for assurances that rates will remain ‘exceptionally low’ for an ‘extended period.’ We do not see this language changing so long as the labor market continues to deteriorate.

Euro Loses Steam

European finance ministers agreed on a rescue mechanism for Greece in Brussels yesterday, but offered little information on details of what the bailout package may look like. The lack of clarity will continue to weigh heavily on the euro which has softened in the last 2 sessions. Indeed EU officials are being careful not to make a precedent of the Greek situation as other Eurozone countries in financial distress will be keeping a close eye with regards to the structure that is chosen for the rescue package.

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