Talking Points

• Euro at Risk as Recession Worries Replace Greece Fiasco in the Spotlight
• Japanese Yen Tracking Treasury Yields, Focus on Fed Minutes and US CPI
• British Pound to Face Selling Pressure as Data Bolsters Case for QE Boost
• Commodity Dollars May Lose Support as Global Slowdown Fears Return

After weeks of preoccupation with Greece and its second bailout package, the Euro appears all but ready to move on. Indeed, traders seemed to resign to the inevitable as early as Wednesday, realizing the ECB had lent banks enough capital via December’s LTRO to ensure a credit squeeze would be averted even if Greece defaulted. The next hurdle was to convince investors that similar provisions would be in place if stress were to emerge in a larger country (specifically, Italy). The ECB rate decision saw policymakers make headway on this front as well, with the bank relaxing collateral requirements for its next LTRO due later this month. This opens the door for more capital to be injected into a wider swath of the banking sector, reinforcing lenders’ war chest and soothing jittery investors.

Importantly, this hardly guarantees a favorable outlook for the single currency. With the credit crunch time-bomb defused for now, the focus turns to growth, where the picture is far from pretty. Economists’ forecasts suggest the Euro zone will be the only G10 economy to sink into recession this year. This beckons further monetary easing. Indeed, considering the goal of LTRO operations is an easing of credit, its impact on the exchange rate can be expected to be essentially the same as the affect of the Fed’s QE efforts on the US Dollar. Needless to say, this bodes ill for the single currency. With that in mind, the spotlight is on fourth-quarter Euro Zone Gross Domestic Product figures next week, where expectations are for output to drop 0.4 percent to mark the first contraction since the region emerged from the Great Recession in mid-2009. The German ZEW gauge of investor confidence is also on tap.

The Japanese Yen is beginning to regain its correlation with the spread between domestic and US 10-year bond yields (see below). With Japanese monetary policy effectively locked in place, traders will be looking to the US for direction cues. Minutes from January’s Federal Reserve policy meeting will be in focus as markets size up the outlook for a third round of quantitative easing. Friday’s Consumer Price Index report will be judged in the same light. A perception that more stimulus may not be as assured as it appeared in the announcement’s immediate aftermath likely pressure Treasury yields and USDJPY higher. Alternatively, signs bolstering the case for QE3 are expected to have the opposite effect, although the downside remains broadly capped by Japan’s “stealth” intervention efforts.

The British Pound appears vulnerable in the week ahead as economic data reinforces the case for the latest expansion of quantitative easing by the Bank of England. Inflation is expected to slow to the weakest in 14 months while the Claimant Count – a proxy for the unemployment rate – is forecast to hit 5.1 percent, the highest since mid-1997. While the Pound rose immediately the BOE announcement as the asset purchase target increased in line with expectations, putting to rest rumors of a larger expansion, the longer-term implications of further sterling dilution appear negative.

The Australian, Canadian and New Zealand Dollars continue to show strong links with stock prices (although the strength of correlation readings has weakened somewhat), meaning risk appetite remains in control. On balance, this does not seem supportive. With Eurozone-triggered credit crisis fears unwinding and the global growth outlook creeping back into focus, the cycle-sensitive currencies may come under increasing pressure as traders are reminded that economists’ median world GDP expectations for 2012 have been sinking precipitously since early August.

EURO

Source: Bloomberg

BRITISH POUND

Source: Bloomberg

JAPANESE YEN

Source: Bloomberg

CANADIAN DOLLAR

Source: Bloomberg

AUSTRALIAN DOLLAR

Source: Bloomberg

NEW ZEALAND DOLLAR

Source: Bloomberg

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

European finance ministers have convened an emergency meeting in Brussels today as the Greek government continues to struggle to finalize of terms of its next rescue package. The ministers will meet with IMF chief Christine Lagarde but no agenda has been announced. Meanwhile, the caretaker government led by Prime Minister Papademos is locked in intense talks with its coalition partners to finalize terms on the package which is crucial if Greece is to meet a EUR 14.5 billion bond payment on March 20. Papademos is also holding talks simultaneously with the so called ‘troika’. In the absence of further developments the EUR has firmed to trade at 1.3260.

The unprecedented action by central banks around the world to intervene in the markets has clearly impacted in a positive way on volatility in the markets. The move by the Federal Reserve to announce that it will keep interest rates low until 2014 and the action of other institutions globally to increase liquidity in the financial markets has seen volatility reduce significantly this year. The risk on/ risk off moves encountered last year with multi percentage moves in assets prices on what seemed like a weekly basis have now subsided. Investors appear happy to undertake a wait and see response. The Australian dollar continues to perform extremely well in this environment and opens today at 1.0800.

Central bank action and intervene have clearly impacted on share market volatility. Once again markets were relatively subdued. The Dow Jones is still trading at its highest levels since 2008 as investors tread water in anticipation of some sort of a resolution in Greece. Finance and technology stocks gained the most on the S&P 500 which closed 0.22% higher at 1,350. Earlier in Europe, bourses closed relatively flat with the DAX down 0.08% to 6,749 while the FTSE lost 0.24% to 5,876.

]]> http://forexbl.com/2012/02/09/market-outlook-for-february-9-2012/feed/ http://forexbl.com/2012/02/09/ecb-bank-of-england-leave-rates-unchanged/ http://forexbl.com/2012/02/09/ecb-bank-of-england-leave-rates-unchanged/#comments Thu, 09 Feb 2012 13:20:16 +0000 admin http://forexbl.com/2012/02/09/ecb-bank-of-england-leave-rates-unchanged/ Both the Bank of England and the European Central Bank (ECB) opted to leave their respective benchmark lending rates unchanged. The ECB rate will remain at 1.0 percent, while the Bank of England rate was held steady at 0.5 percent.
The rate announcements came just hours before the news was made public that the Greek coalition government had reached a deal on spending cuts paving the way for a second emergency bailout for Greece. The rescue package is valued at 130 [...]



Read the full article on forexblog.oanda.com.