Quiet Open To Week

ForexGen lacked motivation in a quiet Asian session. EurUsd bounced around 1.5761 -1.5817 levels while UsdJpy trended sharply upward from 98.82 to 100.18. Friday ended on a mixed note with stock markets weaker due to some weak US data (Michigan index) and energy and commodities price declined slightly. Over the weekend WSJ reported that Treasury Secretary Paulson would announce today "sweeping structural changes in the way the government monitors financial markets" giving the Fed broader authority to secure "market stability." While we are skeptical of giving the Fed such broad powers with very little oversight we are bracing for a resurgence of risk appetite and will be focused on short Jpy trades this week. On this theme the BoJ Tankan report Tuesday will be of interest. Listening to comments last week it seems that the leadership vacuum has created a lack of unity on how to deal with the combination of growing price risk and slowing economy. While currently the BoJ has not officially adapted an easing bias the market is still pricing in 14bp cut within the next 12 months. JPY remains in favor due to risk aversion and declining carry appetite but these themes could come under pressure this week. Another currency on our watch list this week is Gbp. BoE's King is also scheduled to speak. During the MPC testimony on the Feb inflation report last week the members were more pessimistic regarding the UK economy then previously. In addition, King voiced clear inflation risks, with CPI around 3%, however due to the extent of the economic downturn, he commented MPC is more inclined to cutting rates. We still believe that market hasn't fully pricing in a full easing cycle by the BoE with rates slipping to 4.00% by end 2008 so the Gbp has additional room to depreciate.