The FX Winner

Hello Traders, This is what JP and the big money traders think! Following the big money is not a bad idea if you know how. Here is what the scuttlebutt is for this week.

With the market anticipating the busy US event schedule along with any further developments from Europe, the Asian session on Monday seemed to be at a loss of direction especially despite the various EU political events and reports by ECB officials over the weekend. Australian 4Q PPI came in on the softer side with import prices being the main drag. AUD fell roughly 25pips following the release but has regained some of its losses. As such, G10 currencies have traded in a narrow range today – NZD is the top performer among G10s closely followed by USD.

The two main points for the week include whether the 2-week-long out-performance of EUR continues, and whether the USD-selling trend continues. Note that last week, the EUR rally combined with USD weakness led EURUSD to trade up to the 1.36’s for the first time since last November given the comments from Trichet along with the easing concerns over European peripherals.

This week is full of US events that could impact the UST yields and hence the dollar – FOMC, 2-year, 5-year, and 7-year UST auctions, along with a number of US economic data releases. We believe risk is to the downside for the greenback, given its weakness despite elevated 10-year UST yields. Thus, any weak economic numbers, strong auction results, or dovish language from the FOMC could lead to a decline in UST yields and to an easy fall for the dollar. US earnings also continue. Also keep in mind this week sees many EM rate announcements, including Bank of Israel and Hungary’s central bank today, which may have the market directing more focus on EM inflation risk.

FX: NZD (0.0%) is the only pair that gained against USD, with AUD (-0.1%) following behind. SEK (-0.3%) and JPY (-0.2%) are the under-performers. FX vol: As per usual on Mondays, vols broadly opened lower than forward vols and have drifted lower. AUDUSD gamma is being offered aggressively despite the upcoming events.

Commodities: Oil up 0.3% at $89.50/barrel. Gold up 0.7% at $1,351.40/oz. Bonds: JGB curve flattened in the morning, but faced steepening pressure in the afternoon. Equities: Equities trade mixed across the region – Nikkei +0.7%, Hang Seng Index -0.3%, Shanghai -0.4%, KOSPI +0.5%.

Until Next Time Happy Trading Kevin.