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Yen May Weaken As European Debt Concerns Fade, Stocks Rally

Yen May Weaken As European Debt Concerns Fade, Stocks Rally

2010-05-12 16:39:00
John Rivera, Currency Analyst
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BoJ Interest Rate Expectations
 
The Bank of Japan on Friday said it would inject more than 20 billion dollars in liquidity to calm markets in response to global turmoil triggered by the Greek debt crisis. The troubles in Europe give policy makers another reason to maintain their accommodative policy despite the easing of deflation concerns. Overnight Index Swaps continue to price in zero bps of tightening over the next year for the BoJ which will cement the Yen’s position as a funding currency and increase its sensitivity to risk sentiment.  Discuss this and trading ideas join the USD/JPY forum.
 
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FOMC Interest Rate Expectations
 
The prospect for a rate hike in August has risen to 11.6% on the back of improving fundamentals but we have to look past November before we see the odds in favor of tightening. The Fed continues to predict that they will keep rates low for an extended period and the recent issues in Greece should only reinforce their conviction. At the end of last year it appeared to be a certainty that a rate hike would come in 2010, but markets are only giving a 43.2% chance of an increase in November which may make 2011 the safer bet. A strong U.S. retail sales report on Friday could increase the odds in the favor of tightening, as a rise in consumption could put upward pressure on prices and inspire future hiring.
 
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Risk
 
U.S. equity markets continued to find support as concerns that the European crisis will derail the global recovery have faded. Plans for budget cutting in Spain and the U.K. will help stabilize the region but their longer-term impact on domestic growth could become a weighing factor on the global economy. A strong U.S. retail sales report will feed the growing sentiment that the U.S. is the most attractive place to invest which could push the Dow higher and lend USD/JPY support. Discuss this and other fundamental data in the Economics Forum
 
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To discuss this report or be added to the email list contact John Rivera, Currency Analyst: instructor@dailyfx.com
 

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