Persistent Uncertainties Limit Move in Currencies

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The euro and British pound are trading slightly higher against the U.S. dollar this morning but persistent uncertainties in Europe have limited the move in currencies. As long as the makeup and policies of Italy’s government is unclear, the euro will have a tough time recovering even if Italian bond yields have fallen off their highs. Today’s successful bond auction in Italy is very good news for the euro because it indicates that the elections did not completely scare investors away from Italian assets – even Italian stocks are trading higher. Nonetheless investors will not be rushing back into the euro until they know what type of coalition is formed in Italy and whether new elections need to be held. According to the latest headlines, Grillo doesn’t plan to throw his support behind Bersani, which doesn’t make things easier. However stronger Eurozone confidence numbers has lent a bit of support to the currency.

BoJ Governor Uncertainty

Uncertainty is also keeping USD/JPY under pressure. We are still waiting for Prime Minister Abe to make his announcement for Bank of Japan Governor. His government previously said the decision needs to be made this week otherwise it would be too late to elicit support for the candidate before the current BoJ head leaves office on March 19th. Until the announcement is made, which we expect to be within the next 24 to 48 hours, USD/JPY may have a tough time recovering. It is clear that Yen traders are desperate for a fresh catalyst and we believe that nomination of Kuroda as BoJ Governor and uber dove Iwata as one of his Deputies could be enough to renew the rally in USD/JPY.

U.S. Sequester Uncertainty

In the meantime, durable goods and pending home sales are scheduled for release from the U.S. this morning. Durable goods fell 5.2% in the month of January but the majority of the decline was in transportation orders because excluding transportation, durable goods rose 1.9%, which was the strongest rise since October 2011. Pending home sales due out at 10am ET are expected to rebound, which would be consistent with the strength seen in new home sales and the steady recovery in the housing market. Fed Chairman Ben Bernanke will be delivering his semi-annual testimony again today before the House. Day 2 of the testimony usually has a far less impact on the markets than Day 1. The Sequester is scheduled to happen at the end of the week. According to Fitch, “implementation of the spending cuts – sequester- and government shutdown would not prompt a negative rating action,” however “failure to raise the debt ceiling in a timely fashion could prompt a review and likely downgrade of the U.S. debt rating.” The uncertainty around the Sequester is also limiting enthusiasm in the U.S. dollar.

Kathy Lien
Managing Director

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