Trading turned mixed during the overnight trading hours, as investors tried to re-value the state of the global economy after recent sovereign debt downgrades. Euro swung up and down in a 70-pip range, while Gbp/Usd plunged 100 pips, the Aud/Usd tried to push higher, but most of the move was retraced, Usd/Cad and the Usd/Chf lacked any directional bias, while the Usd/Jpy gained 80 pips from the close of the prior U.S. session.
It seems that the moves made by the Usd/Jpy overnight reflect the market’s anticipations towards the 14:15 ET FOMC meeting. If the Fed intimate that higher interest rates are coming, the Usd will probably move higher at a sustained pace. The current 10-years yield differential is favoring the Usd against the Eur, Chf and the Jpy, and is approximately near par compared to the yield on Canadian debt paper. However, the yield paid for the U.S. 10-year Treasuries Notes is slightly lower then the similar maturity U.K. Gilts, and noticeable lower than the that paid by Australian bonds.
If equities find a base during the upcoming U.S. session, then the major pairs will be able to retrace a portion of the ground loss over the prior day of trading. That looks to be seen in the S/P finding support around the 1175 area. However, this outlook is highly dependent on how the Fed statement is delivered, and unless something out of the ordinary happens, the market will probably come to a standstill ahead of the 14:15 ET report. One should note that lately, out of out of the ordinary responses happen more often than believed (thes are called Black swan events).
In the mean time, the situation in Greece continues to worsen. The yield on the 2-year notes reached an incredible 25%, practically closing the country’s door to the debt market. In comparison, the U.S. government pays 1.00% while the German government pays 0.80% for a similar, 2-year loan.
To make the matter worse, the problems in Greece drag other parts of the European economy with, including Ireland, Portugal and Spain, which also saw sudden strong moves in the debt and CDS markets. Overall, this favors short Eur plays for the moment, against the Usd and against the other major currencies.
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