FX Strategy Weekly by Lloyds TSB

A tumultuous end to the week saw equity indices retreat from 18-month highs, with profit taking in commodity and high yield currencies triggering safe-haven flows into the JPY. A tumultuous end to the week saw equity indices retreat from 18-month highs, with profit taking in commodity and high yield currencies triggering safe-haven flows into the JPY. As we look ahead to next week, the prospect of participants re-entering long risk strategies at more attractive levels will be considered following an early run of positive Q1 results and bullish business guidance from US industry bellwethers, and a steady outlook for low interest rates in the G7.

For the UK, one of the bigger weeks of this quarter lies ahead and features CPI (Tuesday), the MPC minutes (Wednesday) and preliminary Q1 GDP (Friday). The second television election debate is also scheduled and will keep sterling on a high state of election poll alert. A less dovish lean by the MPC and possibility of solid Q1 GDP data may add to the constructive sterling view evident from the quantitative developments analysed in this week’s publication. We have also added a special insert on the historical performance of GBP in the build-up to and immediate aftermath of a general election since 1974.

Recap

• The JPY rallied late in the week vs G10 peers as concerted profit taking emerged in stocks, triggered by the SEC charge of fraud vs Goldman Sachs and a weaker Michigan confidence survey for April. The JPY ended the week 2% stronger vs the CAD, NZD and CAD.  A week of ups and downs for GBP saw the currency rally 1% vs the  commodity and high yielding currencies, and log a 0.2% gain vs the USD and GBP. Support for the EUR faltered as Greek bond yields reversed course and posted heavy declines, making an EU/IMF bailout likely. The SGD was the biggest gainer in Asia after the MAS decided to revalue the trading band by 1% based on a strengthening economic outlook and the need to tighten monetary policy. How soon will China follow?
 
• UK yields and swap rates were steady within narrow ranges for most of the week. Profit taking in risk assets on Friday caused yields and swaps to slip back to the low end of their trading range. For 5y swaps, a drop below 2.90% points to a test of the cycle low at 2.82%. The 2y/10y swaps curve steepened to 230bps. A sell-off in Greek government debt squeezed 10y yields back over 7%, despite a strong reception of this week’s T-bill auctions. This caused the spread over bunds to surge back over 430bp, a level last seen prior to the announcement of the EU/IMF loan accord. US 2y yields slipped back below 1% following Friday’s equity sell-off. EU 5y swaps plumbed a new low at 2.35%.

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