FSAs Lord Turner's Comments Weigh on Carry Trades

AUDUSD R 2: 0.9050 R 1: 0.8960 CURRENT: 0.884 S 1: 0.8780 S 2: 0.8735

USDCAD R 2: 1.0780 R 1: 1.0745 CURRENT: 1.0698 S 1: 1.0625 S 2: 1.0555

EURJPY R 2: 127.10 R 1: 126.70 CURRENT: 125.23 S 1: 124.40 S 2: 122.15

USDMXN R 2: 13.145 R 1: 13.105 CURRENT: 13.080 S 1: 12.945 S 2: 12.890

Market Brief

FX markets were relatively range bound at the start of this trading week. The EURUSD jumped around between 1.3855 and 1.3890, while the USDJPY traded up to 90.38 before falling back slightly. The USD and the JPY trades gained initially in Asia, as the UK Times reported that FSA chief Lord Turner had commented that carry trades were without real utility and hinted of a potential crackdown. It seems that the reported comments could be signaling a regulatory tightening for trades (which he views) serving little or no useful social and wider economic purpose. Asian regional stock indexes had a bumpy morning but things have begun to look slightly brighter as we approach the European open. We should mention that at this point half of the S&P has reported with roughly 70% of corporate earning printing higher than expected. In spite of this positive turn, equity prices are still weighing on risk correlated trades. We believe that it's concern over sovereign credit risks and worries that China will tighten monetary policy that are hurting sentiment over corporate earnings outlook. In addition, news that the US will sell arms to Taiwan has aggregated the Chinese and could mean rising trade tensions in the near term, which would also weigh on these defining macro driver.Last week, Finance Minister Merz said that he was comfortable with the CHF levels against the EUR. However, on Friday it was rumored that the central bank returned to the Fx markets. Remember it's the SNB, not the Swiss government, that determine the exchange rate policy. Despite the grandstanding, its clear that the SNB was uncomfortable with the sharp fall in the EURCHF and the new threshold seems to be 1.47. Moving forward, with the EUR suffering from a myriad of internal problems, the EURCHF should continue to naturally depreciate and participants should expect further SNB action. While there is no exit schedule, fundamental pressure will not allow the SNB to support the EURCHF forever. Long term players have begun to trade around this concept.

This week will be chocked with central bank rate decisions - the RBA, Norges Bank, ECB and the Bank of England. Perhaps the most interesting and market moving will be the RBA. Markets are expecting that the Australian central bank will raise the cash rate 25bp to 4.00%. However, the bills market is less convinced and is pricing in only a 16bp increase. No only will the rate decisions be important, but in the accompanying statement we expect that rates are close to neutral and any additional tightening will be data dependent...words that will most probably hurt the AUD in the short term.