EURUSD Vols elevated, BoJ

Forex News and Events

EURUSD 1-month ATM implied volatility remains elevated around 17, as uncertainty around the Greece lingers. Media reports indicate that Greek Prime Minister Alexis Tsipras spoke with senior European officials about speeding up the new bailout deal process. Ironically the name of the team of representative from Greece and its creditors is the Brussels Group, a place not renowned for its rapid action responses. After last week’s deadlock discussions and rumors of a “plan B” circulating, the divide feels extremely wide. We remain speculative that an agreement or a deal that can last will be reached. That said, with EURUSD now at 1.08, the market seems to be pricing in an inevitable agreement based on merely the fact that Greece is exceptionally short of cash indicates a deal must be close. In addition with a lack of easing by central banks this week the policy divergence trade which has accelerated USD will diminish.

Wednesday FOMC

Outside the Brussel and Athens negotiation, traders will be watching Wednesday FOMC rate decision meeting. Clearly Q1 US economic data has been disappointing since the last meeting. Therefore, we anticipate a slightly dovish policy statement as FOMC members recognize the soft patch the US economy is currently suffering through. Most of this dovishness has already been priced in with expectations for a 2015 rate hike diminish significantly resulting in the DXY index falling to 97 and US treasury curve flatting (10yr treasury yields stable at 1.90%). Traders will be listening to how hawkish/dovish the data dependent members economic outlook have become. Should they discount the current weakness as transitory (as we expects), speculation of a September hike will get a lift. In the midterm, remain bearish on EURUSD, while period of consolidation around the 1-0.6 -1.08 level, can be expected as economic weakness get pushed through.

BoJ

The BoJ meeting scheduled on April 30 and the released of March CPI on Friday may trigger some erratic movements in the JPY. We expect the BoJ to maintain the key policy of increasing base money at an annual pace of about ¥80tn. The central bank will also provide its GDP and CPI forecasts; we expect it to be revised downward as the Japan economy didn’t pick up as expected during the first months of 2015. The release of the CPI on Friday will be closely watched – National CPI for March is expected at 2.2% and the ex-VAT around 0.2%y/y. We expect inflation to be close to zero or even to go into negative territory before the end of the year as inflation has steadily decreased since May 2014. Therefore, the BoJ may stimulate further the economy this year, the release of the Tankan and CPI figures will thus play a determining role.