Asian central banks didn't surprise – in line with expectations
the Reserve Bank of India increased interest rates by 25 bps and the
Bank of Japan didn't alter monetary policy parameters. The hike in
India didn't have a negative effect on the markets – such effect
could appear if it was joined by the Chinese monetary authorities
within next few days (which isn't unlikely).
Meanwhile, the BoJ updated macroeconomic forecasts, significantly
lifting a forecast for the current fiscal year (to 3,3% from 2,1%) and
also rising the forecasts for inflation along the path, which is good
for yen, but at the same time moderated forecasts for GDP in fiscal
'11 and '12, reducing a positive impact on the Japanese currency.
*EURUSD – PIIGS' bonds on the rise*
Euro continued to advance yesterday, supported by the peripheral bond
markets in the euro zone. We pointed out on a few occasions, the a
current appreciation of the euro has been a sort of relief rally after
markets realized the crisis wasn't about to amplify in January.
However, should we assume the improvement to be temporary, a scope for
further gains of the euro might be limited – at least that is
suggested by a examples from last year.
We had three mini-rallies on Spanish and Portuguese bonds last year
and each time the euro advanced significantly, regardless of other
circumstances. Those moves took place in July, October and at the
beginning of December. Moves from July and October were similar in
length – each lasted nearly for a month, an improvement from late
November and early December actually lasted only few days. On the
other hand, rallies from July and December were similar in scope –
10y spread (vs bunds) for Spain each time fell by around 70 bps
(measured at daily closing prices), in October it was roughly 40 bps.
So how does the current run compare? A rally started on 10th January
so when it comes to length it could well last for another two weeks.
However, the Spanish 10y premium is already down by some 70 bps,
suggesting a limited scope. Moreover, the Spanish premium – lowest
in nearly 3 months, has returned to a range from the Greek and early
Irish phase of the crisis (when Spain wasn't in the spotlight yet),
further confirming a limited scope for gains. While there is no
imminent danger at the moment (large bond offering or redemption, a
significant vote etc.), there is also apparently little room for
further gains (for the euro) fueled by peripheral debt markets.
*Events to watch – UK's GDP, US Conference Board and more
quarterly results*
UK's advance GDP (4.30 ET, 10.30 CET, consensus +0,5% q/q) might be
crucial for the pound in the near term as it will answer the question
if there is a chance for earlier than expected tightening. Without
well anchored recovery, the BoE will be reluctant to touch rates even
in context of a high inflation. In the US, the key reading today is
the Conference Board sentiment index (10.00 ET, 16.00 CET, consensus
54,5 pts.). Quarterly earnings reports will be released by 3M, Altera,
DuPont, EMC, Johnson&Johnson, Travelers, Verizon i Yahoo.
Source: Fxstreet.com
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