Yen Selling Continues, Euro May Rise on PMI, Pound Eyes BOE Minutes

Talking Points

• Japanese Yen Selloff Continues as US Treasury Bond Yields Rise
• Euro May See Brief Gains as PMI Data Shows Mild Improvement
• British Pound Focused on BOE Minutes as Traders Shape QE Bets

Major currencies stand little changed against the US Dollar in late Asian trade, with markets apparently taking a breather after yesterday’s Greek bailout deal closed the book on a theme that preoccupied sentiment trends over several weeks. The Japanese Yen underperformed, sliding as much as 0.4 percent against its leading counterparts after US Treasury bond yields advanced as economic data in the world’s top economy continued to outperform expectations, denting QE3 expectations. Reduced demand at a 2-year Treasury note auction likewise helped push yields higher. Correlation studies show the Yen tracks closely with US bond yields.

Looking ahead, the spotlight shifts to a busy European economic calendar. First up, the preliminary set of Eurozone PMI figures is expected to show manufacturing- and service-sector activity continued to cautiously improve in February. The region-wide composite gauge is expected to rise to 50.5 compared with 50.4 in January, hovering just a hair above the 50 “boom-bust” threshold that separates contraction from expansion.

In the aftermath of the Greek bailout fiasco, the focus for the Euro has shifted to the monetary policy, underscored by a firming correlation between EURUSD and German 2-year bond yields. In this context, the mild pickup activity may offer a bit of a lift to the single currency. Importantly, PMI readings are set to remain significantly below their post-Great Recession averages, much less the peak readings recorded a year ago. This means they will almost certainly fall short of meaningfully dismissing 2012 Eurozone recession expectations, making any Euro gains a short-lived affair.

Next, the spotlight turns to the UK as the Bank of England releases minutes from its February monetary policy meeting. As usual, the vote tally will be of greatest interest as traders gauge conviction in favor of additional QE based on the number of voices in favor of the latest expansion of asset purchases on the rate-setting MPC committee. A strongly dovish bias is likely to weigh on Sterling, and vice versa.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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