Saxo Bank | Apr 22, 2014 06:41AM ET
A quiet few days for FX since last Thursday as much of Europe, including yours truly, was off on holiday for a four-day weekend. There were few interesting developments as the JPY and CHF are on the weak side of recent ranges and the USD is still down, but not entirely out, as it trades in the middle of the recent ranges versus the Euro, Japanese yen, and Australian dollar. Japan has reorganised the Government Pension Investment Fund, installing new committee members for the manager of approximately $1.25 trillion in assets. Abe has focussed on the fund’s investment strategy as a key reform objective, hoping to have the fund invest more aggressively. Watch for new announcements for the fund on how it will allocate funds from here, which will obviously have huge potential implications for the Japanese yen if foreign bond- and equity allocations are raised. Chart: EURUSD EURUSD and the ATR in the lower panel show the collapsing volatility in EURUSD to the lowest levels since mid-2007. Back then, the volatility continued even lower while the market tried to figure out whether the pair should head to the then all-time highs above 1.3650. As the US subprime crisis broke and the Fed moved with a large 50-basis points cut at the September meeting, the answer was an emphatic “Yes!”. This time around, it is about whether there is anything that can perturb the anticipated forward path for the Fed (slow tapering and an eventual first hike out around mid-2015) and whether the European Central Bank (ECB), though dovish, really can launch a QE-type easing that will weaken the single currency. Interestingly, the low volatility episode is coming around the same price levels. I suspect that volatility will bottom out soon as the answer to the ECB portion of the question is likely just ahead at the May or June meetings. Clarity on whether the anticipated Fed trajectory remains justified may take a bit longer. The downside in EURUSD has far more potential as any further upside from here will generate a vigorous ECB response.
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