Major Currencies vs. US Dollar (% change)
13 Jun 2011 – 16 Jun 2011
EUR/USD: Euro to Rebound as Greek Fiasco Stalls
The centrality of the Greek debt crisis to the markets at large has allowed EURUSD to rebuild its correlation with the MSCI World Stock Index, a proxy for the overall trend in investors’ risk appetite. Stocks and the single currency have seen their share of punishment as EU officials continued to dither on bailing out the Mediterranean nation even as market confidence collapsed under the weight of the uncertainty of what a Greek default may actually unleash. Indeed, use of the L-word (“Lehman”) became widespread.
Looking to the week ahead, the heretofore singular focus on the Greek issue is likely to allow both the Euro and risk appetite at large a chance to stage a relief rally. While the situation has not materially improved – indeed, CDS rates no imply a higher chance of a Greek default than they did last week (81.8 percent) – the landscape is in flux and a series of outcomes will need to be seen before the bears are prepared to pounce again. The festivities begin as Greek Prime Minister George Papandreou and his newly-minted Cabinet face a confidence vote (Tuesday) and conclude with an EU leaders’ summit in Brussels (Wednesday-Thursday) where the Greek issue is sure to be a central topic of conversation. With no new bad news in the interim, a bounce to relieve oversold conditions appears reasonable. German IFO and region-wide PMI figures headline the economic calendar.
GBP/USD: All Eyes on Bank of England Meeting Minutes
Last week witnessed the reemergence of risk sentiment as the key driver of the British Pound in the absence of anything meaningful on the domestic docket. This dynamic may not prove lasting however as the spotlight turns to the Bank of England, with the monetary authority set to release minutes from this month’s meeting of the rate-setting MPC committee.
Traders will pay particular attention to the voting pattern considering the hawks’ top champion – Andrew Sentence – has been replaced by Ben Broadbent, a moderate former Goldman Sachs economist. Mr Broadbent has made clear that he agrees with the thrust of BoE policy thus far, meaning he can hardly be assumed to take up where Mr Sentence left off, narrowing the hawks’ vote count to just two. On balance, this promises to reinforce the now dominant consensus view that the BoE will remain firmly dovish for the time being, putting Sterling on the defensive against most of its leading counterparts (with the possible exception of the US Dollar, where it may gain but underperform amid a broad-based recovery in risk appetite).
USD/JPY: Yen Caught Between EU Developments, FOMC
The Japanese Yen looks set for a volatile week as the currency’s historic relationship with US Treasury bond yields and sensitivity to risk sentiment trends (by virtue of being a go-to funding currency for carry trades) put it squarely at the epicenter of major event risk. The pressure begins to mount as Greek Prime Minister Papandreou stands for a confidence vote and carries swiftly into Wednesday’s Federal Reserve monetary policy announcement, the first since Bernanke and company called an end to QE2. The week concludes with the aforementioned sit-down of EU leaders in Brussels.
On the Euro Zone front, a bit of a respite is in order (as discussed above), which out to put downward pressure on the Yen as carry trades thrive amid a broad-based recovery in risk appetite. As for the Fed, significant policy changes are essentially off the agenda, with traders turning their attention to the tone of the rhetoric accompanying the announcement in an attempt to reconcile hawkish posturing from Fed officials (including Plosser, Fisher and Kocherlakota) with the neutral-dovish approach of Ben Bernanke himself. As last month, this puts the spotlight on the Chairman’s press conference as well as the presence of a promise to keep rates low for an “extended period” in the policy statement.Two interpretations are possible: a dovish posture may weigh on US yields and pressure the Yen higher, but if that is taken as a positive development for risk appetite the Japanese currency may yet find itself on the defensive, and vice versa.
USD/CAD, AUD/USD, NZD/USD: Comm Bloc to Bounce with Stock Prices
Broadly speaking, the commodity bloc remains anchored to stock markets. As with the Euro, this opens the door for a move higher over the near term as worries about the Greek debt crisis take a back seat for lack of fresh reasons to continue selling while Ben Bernanke and company deliver what is shaping up to a predictably dovish monetary policy announcement, clearing the way for risk appetite at large to stage a relief rally. The domestic economic calendar is decidedly lackluster in all three countries for the remainder of the week, seemingly assuring the centrality of sentiment as the key driver of price action.
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