Setting the cat among the pigeons

The Fed’s FOMC minutes which raised the spectre of an earlier than anticipated tapering off of asset purchases have really set the cat amongst the pigeons, fuelling selling in equities, commodities and various currencies against the USD. The impact was reinforced overnight following relatively hawkish comments from the Fed’s Bullard and Fisher.

US Treasuries rallied however, as risk aversion crept back into the market following weaker data releases in the Eurozone (manufacturing and service sector purchasing managers indices) and in the US (February Philly Fed manufacturing survey and higher than forecast weekly jobless claims).

The German IFO business survey is the main event on the data calendar today, with a small gain expected. The second 3 year LTRO payback to be announced today and the Italian elections will also be in focus.

In the US attention will turn to a meeting between President Obama and Japanese Prime Minister Abe. Given the IMF’s tacit approval of Japanese policy it is unlikely that any criticism of Japanese FX policy will be forthcoming at the meeting.

Markets are set to trade cautiously around these events but the main theme will be the overriding impact of this week’s Fed minutes, which has really changed the dynamic in markets, especially for currencies, with the risk / reward of selling USDs now looking much less attractive.

USD is set to continue to trade with a firm tone and EUR in particular looks vulnerable. The continued fall out from Fed FOMC minutes, disappointing PMIs yesterday, Italian election uncertainty and likely lower than expected ECB LTRO repayments today suggests that EUR/USD will face more downside risks. Look for a test of support around 1.3140, which if broken will open the door for the psychologically important 1.30 level.

USD/JPY is likely to consolidate further awaiting the announcement of a new Bank of Japan governor, with JPY selling momentum continuing to abate. AUD was lifted by RBA governor Steven’s comments which did not indicate an urgency to cut policy rates further nor to intervene to lower the value of the currency. AUD/NZD continues to look constructive on the upside given the contrasting comments on the AUD and NZD from both central banks.

Please note my blog posts will be a bit sporadic over the next couple of weeks a I am will be traveling.

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