Yesterday's Eurogroup meeting in Brussels provided nothing of note and we don't expect anything of real substance from today's wider Ecofin group of 27. The markets should be hit with comments from EMU nations on their pledge of support for Greece, but will lack an official bailout plan. We still believe that the EC strategy will be to drag their feet as long as possible in the hopes that markets normalize and any shift in the original tone of the Maastricht Treaty can be completely avoided. Baring any official commitment on aid, we believe the EUR will continue to be sold on rallies (especially given uncertainty around Greece to re-finance debt maturing in the Spring). The FOMC rate decision on today should be pretty run-of-the-mill, with the accompanying statement reiterating policy rate 'exceptionally low' for an 'extended period' and even mentioning positive progression in economic conditions. Generally, BoJ's two-day meeting is hardly a mark in FX trader calendar. However, this week's should warrant a great deal more attention. In recent weeks, the government pressure on the BoJ has intensified, including today's comments from Japanese FM Kan, who stated that the BoJ has been working and will continue to work with Government to beat deflation and the central bank understands Government's expectations through discussions in Parliament. A number of media reports have speculated that the BoJ policy board is ready to introduce measures necessary to create an even loser form of monetary policy. While we believe QE is around the corner, with policy rate of 0.1% there is not much room for further contraction. Without a wider US- Japan yield differential, USDJPY upside will be limited (unless we see FX decouple form yields). In the UK, the BoE MPC minutes are due on Wednesday and markets expect a unanimous vote to hold monetary policy unchanged. There has been a growing call for further quantitative easing from several members and we expect that additional £25bn asset purchases remains in place. However, the timing of the increase will be variable, based heavily on CPI coming down. In this environment, we expect the GBP to come under significant selling pressure falling below 1.5000 this morning (already hearing grumbling over low liquidity). The SNB appears to be letting EURCHF slip gently, despite last week reiteration of FX interventionist stance. Given recent comments and official inflation forecasts, we would trade very gingerly around these levels. As we had stated yesterday things are heating up around the USD - CNY relations with around 130 members of Congress signing a letter expressing 'serious concerns about China's manipulation of its currency'. With the soft sell failing to motivate China, the US seems to be switching to hard ball. And on a side note, the article in the New York Times on the Junk Bonds coming due in 2012 should be read. Overall, in this environment, especially considering the Greek situation and UK potentially reinstating their QE, we favor long USD and EM positions. We are highly suspicious of any JPY strength and would be looking to fade positive news.
Forex-Chart