Yuan band widening, Euro still under pressure, Yen firm

The big news over the weekend was the widening in China’s CNY trading band to 1% from 0.5% previously. It is unlikely to have much of an impact on global markets, with the move not particularly surprising.

China clearly wants to add more two-way risk to the market and in this way the it allows the CNY to better reflect daily market conditions. Nonetheless, CNY is currently seen around equilibrium and appreciation pressure is limited , suggesting that intra day volatility will remain limited.

The USD index is trading around the middle of its range for the year and FX volatility has declined. Recent data disappointments have taken the shine off the USD and revitalized the debate on more Fed quantitative easing. Bouts of risk aversion have given some support to the USD but this has to be balanced against weaker US data.

It will require a renewed rise in US bond yields and an increase in risk aversion before the USD can strengthen anew. Data over coming days may offer some support but whether releases including retail sales, manufacturing surveys and industrial production prove sufficiently strong to boost US bond yields is debatable, suggesting another week of benign USD action.

EUR/USD remains close to its recent lows and is showing little inclination to move back up towards the top of its 1.30-1.35 range. Renewed worries about Spain’s fiscal/debt position as well as opposition to reforms in Italy threaten to keep the EUR restrained.

Data releases may actually regain some attention over coming days however, with the key April German ZEW and IFO surveys scheduled for release. The former is expected to fall slightly while the latter is expected to remain close to the March level.

Given that both surveys have been rising over recent months the outcomes will not prove particularly worrying. However, little change expected in both surveys suggests that the EUR will find little support either. EUR/USD technical support is seen around 1.2974.

Another trade deficit expected in March in Japan will support a JPY bearish view but in reality much of the reason for the deficit is not related to the strength of the JPY but rather external demand weakness and strong energy imports.

Nonetheless, the rise in the JPY over recent days will have fuelled renewed concerns among Japanese policy makers while piling on the pressure on the Bank of Japan to be more aggressive on its policy stance.

I suspect USD/JPY may have further to fall in the short term as its move corresponds with the narrowing in the US yield advantage over Japan. A drop below USD/JPY 80 looks increasingly on the cards.

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