Forex markets: The BoJ meeting should contribute to the yen’s downtrend

The agreement reached for the Greek debt swap does not seem enough to fully remove the downside risks weighing on the euro. The FOMC meeting, while interlocutory, should not penalise the dollar. The BoJ meeting should contribute to the yen’s downtrend. For sterling to weaken, labour market data must prove to be unequivocally negative…     

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          USD (nominal effective exchange rate) – This has been an interlocutory week for the dollar, due to mixed indications from different sources. News of the downward revision of China’s 2012 growth target, and the Chinese government’s announcement that it intends to pursue greater exchanger rate flexibility, contributed in part  to weakening the US dollar. On the other hand, uncertainties over the Greek crisis supported the dollar, given its status as a safe haven. Next week the FOMC meeting is scheduled. The post-meeting press release will probably keep all options open in terms of future growth-supportive monetary policy actions, if need be. The effect of the Fed taking this stance should prove generally favourable for the dollar.       

          EUR – The euro proved rather volatile in the week, due to (1) the outcome of the ECB meeting, that is the wait-and-see stance taken by the central bank, and (2) the reaching of an agreement on the Greek debt swap. After dropping from EUR/USD 1.32 to 1.3096 in the first part of the week, on Thursday the euro recovered more than it had lost, “betting” on a good agreement, rising back to just shy of 1.3300. In the wake of the announcement, however, the exchange rate fell back to 1.31. At this point the relevant  range in technical terms is the 1.3230-1.3165 corridor, which opens the downside front towards EUR/USD 1.26-1.25. The size of short euro trades on the market hinders a correction of the single currency. However, once the Greek crisis is over, in the strictest institutional rather than in the tangible sense, uncertainties tied to growth in the euro area and to the still unresolved problems of peripheral countries should continue to fuel downside pressures  on the euro (downside targets  below 1.31 are 1.3030 – 1.2827 – 1.2624).      

          GBP – The positive correlation between the GBP/USD and the EUR/USD made a comeback. On Monday, despite the very poor services PMI, the pound did not drop as the upward movement of the EUR/USD prevailed. However, on Friday even more disappointing data on industrial and manufacturing output were adequately registered by sterling, that regained some independence. This suggests that  as the Greek crisis is gradually put on the back burner, the own issues of the UK economy will resume having a stronger impact on sterling. Next week, releases will include data on the labour market, which are expected to be negative. Barring favourable surprises, these should start to weaken the position of the pound, both against the dollar (down towards GBP/USD 1.56-1.55) and the euro (towards EUR/GBP 0.8500). As widely expected, on the other hand, the BoE meeting was a non-event, with both rates and the APF

          JPY – Aside from some normal – and modest – volatility,  the yen gave no sign of denying the downtrend which began last month. This week’s mostly lateral trend should represent a preparatory phase ahead of a continuation of the downswing, pointing towards an upside breach of USD/JPY 82.00. Next week, an impulse for the initial breach of USD/JPY 82.00 may come from the BoJ meeting.

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