Forex - USD Gains as Equity Markets Weaken

Forex News and Events:

The USD was able to pick up some lost ground today, as risk aversion in equity markets lent the greenback some support. There was an article in the NY times, which reported that China is moving forward with levying tariffs on US automotive products and chicken meat, in response to President Obama's recent decision to levy tariffs on Chinese tire exports. The renewal of protectionism concerns between the US and China led to the overnight sell-off in risk correlated trades. The Nikkei was down -2.3% and S&P futures are pointing to a lower open. Gold and silver fell to $994.00 and $16.30, respectively. The USDJPY fell to 90.20 before rallying back to 90.70. Interestingly, the correlation between the JPY and equity markets continues to fall, while USD/JPY and DXY correlation has significantly increased. We expect that the recent JPY strength will force investors to consider the spillover effect to Japanese exporters’ earnings witnessed in today's Nikkei sell off. In the days to come, we believe Japanese policy markets will become increasingly vocal with their dissatisfaction. In this regard, traders will be specifically focused on Tuesday’s BoJ monetary policy meeting and the central bank’s accompanying statement. In addition, this will be the first BoJ meeting after the historic elections and the marginally independent CB might provide some direction for the young government. The other central bank meeting that traders will be watching, considering the recent currency strength, will be the SNB. Along with the JPY, the CHF has been one of the biggest gainers in recent weeks. We expect the SNB on Thursday to hold rates, but to once again affirm that CHF strength is unacceptable and halting further appreciation is at the top of their agenda. Today's Producer and Import prices came in at -5.5% vs. -5.4% y/y exp. If nothing else, they confirm Switzerland’s subdued inflationary trend and support the SNB fear that deflation remains a strong risk. The USD strength has been very apparent in the GBP, as markets speculate that the sterling is due for a correction. The Cable is now trading below its 5day MA at 1.6540. This should be an eventful week for the UK and sterling, as along the normal economic releases, Governor King and other MPC members are expected to testify to lawmakers on Tuesday and will be asked some very direct question of the future plans of QE. For the rest of the day, markets will be watching Capacity Utilization from Canada (USDCAD has found buyers briefly penetrating the 1.0990 psychological resistance), equity markets and a US Fed speakers.

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