- The USD index sold off over the course of the week, as the market continued to reduce expectations for monetary tightening in the US. The yield on the December Eurodollar contract has now dropped 24 bps since last Friday, a move accelerated by Wednesday’s FOMC statement, which suggested a near-term rate hike would not be seen. The index is currently poised to close below trend-line support from the March low at 72.45. Market looks for further losses in the week ahead.
- EUR/USD ended the week a figure and a half higher. An expected rate hike from the ECB on Thursday and the maintenance of a tightening bias at the press conference should keep the pair supported. The call for a near-term test of 1.6000 is maintained. However, the weakening economic data in the Eurozone and sharp decline in capital inflows suggest that the EUR’s gains are unlikely to be sustained on multi-month basis.
- Broad based dollar weakness helped GBP/USD post a figure of gains this past week. BoE Governor King suggested in his parliamentary testimony on Thursday that a near-term hike in the UK is unlikely, despite elevated inflationary pressures, as the economy continues to weaken. Nonetheless, market still believe that cable is oversold and expect GBP/USD to continue to strengthen.
- USD/JPY ended the week by making a significant retreat from its June highs, as risk aversion increased. After unsuccessfully testing the 200-moving average on the upside, USD/JPY broke below support formed by the trend-line from the March low. Further losses seem likely in the week ahead, as the dollar continues to weaken, with the VIX revisiting levels not seen since early in the month.
- The Treasury curve bull steepened as credit fears returned and there was nothing in the FOMC statement that suggested the FOMC would be ready to move at the next meeting. Before the announcement the market was looking for nearly a 50% chance of such a move.
- Although the FOMC statement included increased concern on inflation expectations, the record low income expectations in the Consumer Confidence survey suggest that high inflation will remain limited to elevated commodity prices as real income gets squeezed. Going forward, market thinks that the market has further room to rally on economic and financial weakness but less so than just a week ago given the magnitude of the rate decline this week.
- Given the rally of the last few sessions, only a downside potential of 10bp is seen for the short end of the Euro curve. However, further weakness of the equity market would be supportive for the Euribor futures.
Currency / Fixed Income Strategy - June 28 2008
June 28th, 2008 · No Comments
Tags: FOREX Market Commentary
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