Friday, April 8, 2011

Traders Say RBI Likely Intervened in Forex Market

COMMENT: ECB - Not a series? - IFR

LONDON Apr 8 (IFR) - There is a lot of focus on the comments from Trichet that this is not the start of a series of rate hikes. For those that might believe this to be true first take a look at what Trichet said during the Q&ampA at the Dec 1 in 2005 "We are not engaging, ex ante, in a series of interest rate increases. And, as I have said, we will continue to monitor closely all developments with regard to risks to price stability". Subsequently the ECB followed this with 125bps hikes during 2006.
We currently are sticking with the view that we will see at least 100bps in the current tightening cycle and look for the next hike to be delivered in July. There is the risk that it can happen in June (and the market is 50/50 between a June or July hike) but without more ECB speak we are not inclined to change our call. The key over the coming weeks will be to keep an eye on money markets to see how the new higher deposit rate floor impacts liquidity parked at the ECB. With excess liquidity currently around 10/15bn there is going to be a very significant impact on EONIA with the market already priced for the o/n rate trading closer to the refi rate.
The financial market impact has already been seen with further upside on EUR/USD as well as a flatter yield curve likely to remain strategic plays at least until the Fed looks to signal its exit.
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Tuesday, April 5, 2011

Tuesday 05/04/2001 FX Comments

AUD weaker post surprise trade numbers.

RBA left rates unch as expected and their language consistent with prev. re comment on strength of AUD keeping infl down.

Resumption of coal output taking longer than expected ..being pushed by the AUD bears .

NZD higher. Fin Min – I would be surprised if another cut needed.

FT - Portugal fears again.. Article in the FT highlighting their 10% yields and moody’s catching up with S&P / Fitch by downgrading them this am.

We noted CTA interest to reduce USD shorts on a few axes yday…some retraced by the end of the day ..some didn’t ….USDCAD for eg.

UK PMI services a key for the UK . But we’ll need a number close to 55 to persuade mkt a May rte hike may occur.


JPY - A small standout of USDJPY selling from Japanese base EURGBP - Real money name has sold EURGBP at 0.8800 lvl Asian FX – Models and Macro have sold USDINR Quant base sell USDIDR

Friday, April 1, 2011


'CARRY TRADE''  is a common theme in conversations this the
USDJPY move and FED speakers..
We've seen CHF weaker this am , albeit on light flow, EURCHF taking out prev
resistance at 1.3040.

Take a quick look at this brief  piece from David Bloom this morning.
Highlights his thoughts on whats going on in this space at mom...


FX Strategy

G7 co-ordinated intervention has effectively removed the JPY from the normal
currency landscape.

In the wake of the intervention, volatility in USD-JPY has fallen and should
continue to do so. The USD-JPY is already back above pre-disaster levels and
there is increasing appetite to buy the carry favourites.

The intervention is offering downside protection on USD-JPY, and suppressed
volatility. Carry currencies such as AUD, BRL,TRY, and ZAR are all now

This has distorting consequences for the CHF as well. If the market turns
risk averse the JPY no longer offers a safety valve. This leaves the much
less liquid CHF at the mercy of those looking for safety. So suppressing
volatility in the JPY could cause increased volatility in the CHF.


In essence the idea of creating "stability" in the FX markets sows the seeds
of instability. It creates an artificial FX "level" that allows investors to
take risks and positions they might not have otherwise taken. That means the
JPY is unable to trade at an equilibrium level and is kept at an artificial
level. So in essence the G7 co-ordination will lead to unintended
consequences of a
strong CHF in a "risk off" environment and a stronger AUD, ZAR, TRY and BRL
in a "risk on" environment.

As usual with these carry trades, they will work brilliantly for a time and
then unravel very quickly. As always with the carry trade it is up the
stairs and down the elevator.

The unintended consequences of the G7 intervention are a major theme for now
- until of course the end of QE2 becomes dominant.