FX Technical Strategy Weekly

A strong bid in commodity prices, low volatility and optimism over the global economic recovery added fuel to the rally in risk assets this week resulting in a good overall performance for the AUD and NZD.

A strong bid in commodity prices, low volatility and optimism over the global economic recovery added fuel to the rally in risk assets this week resulting in a good overall performance for the AUD and NZD. The start of US Q1 reporting season, speculation of a currency shift in China and the possible activation of an EU rescue for Greece are set to take centre stage next week. EU intervention in Greece, with the IMF as a key funding partner, may soon be a fait accompli after the latest episode of turmoil in Greek government debt and CDS spreads. The UK economic calendar is fairly thin next week and means that election polls, Party manifestos and gilt auctions will attract close scrutiny. Near-term uncertainty over the direction in sterling remains unusually high, and clouded by the mandate of the next government to impose rigorous fiscal discipline. We think fears of a hung parliament may be misplaced, and in the event, could be offset by gradual a shift in BoE rhetoric as inflation expectations accelerate and the economy steers towards a second successive quarter of growth.

Recap

The JPY rallied against all the G10 currencies this week, posting its biggest gain vs the Swiss franc (+2.1%). The AUD and NZD firmed 0.3% vs GBP and 1.4% vs the USD. Profit taking in the USD on Friday knocked the dollar index DXY back to 81.03, the 20d MA and lifted GBP/USD to 1.5392, the highest since late February. Optimism that the EU will finally announce more details of its financial support for Greece lifted EUR/USD back over 1.34. The downgrade of Greece by Fitch to BBB- late on Friday triggered no major reaction as talk circulated of an EU announcement. A two-week decline in EUR/GBP came to a halt on Friday, after the pair bounced off a 0.8706 low to close above 0.8750.

The BoE and ECB left key interest rates unchanged at 0.50% and 1% respectively. The BoE reiterated that it will keep its £200bn asset purchase facility under review. The ECB announced changes to its collateral framework, introducing a sliding scale of haircuts designed to make a distinction between member state credits. The new plan effectively extends the special measures taken by the ECB in the middle of the credit crisis two years ago.

UK 10y yields touched the upper end of the trading range at 4.06% but below 4% reversed after a strong reception of 10y and 30y auctions in the US. Yields ended the week near their highs, supported by higher commodity prices and a rally in equities,. Bond auctions in the UK and the euro zone also drew solid demand. UK 5y swaps oscillated around 2.90% but closed the week at 2.93%, the upper end of the trading range. The 2y/10y swaps spread was rangebound and closed virtually flat at 227bp. UK 10y swap spreads closed the week 4bp wider at -16bp. A sell-off in Greek government debt squeezed 10y yields to 7.50%, causing the spread over bunds to climb over 450bp, the highest level since the inception of the euro.

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