FX Developments

The US dollar is more mixed today, ahead of the FOMC statement and Bernanke press conference.  The euro pushed above $1.47 in Asia, partly on the back of cross rate gains against the yen following S&P cut of the sovereign outlook for Japan and the outlook for half dozen public institutions.  JGBs were not impacted, but the yen did soften.  

In fact, yen weakness is a key theme.  It has been the strongest of the major currencies since April 8, which does not seem justified on the basis of the recent drivers like the general risk appetite.  Support fo the dollar is seen in the JPY81.80-JPY82.00 area now. 

The other notable story today is sterling.  It is the strongest of the majors.  The Q1 GDP estimate was in line with expectations of 0.5%, but rumors of a weaker number and lingering effects of BOE hawk Weale's comments last week had encouraged the market to lean on sterling's short side, allowing for the squeeze today.   Key resistance is near $1.66 for cable. 

Not much to add to yesterday's note about the FOMC and Bernanke's press conference.   Keep in mind the distinction between transparency and visibility.  The press conference is about process not substance.  Bernanke must stil feel comfortable he can control the substance even if the process--open Q/A may be less predictable.  The purpose most certainly is not to add volatility.  

The Fed is still easing US monetary policy.  The ECB is still in a tightening mode.  Note just raising interest rates, but liquidity is also being removed.  In today's 3 month repo operation a little more than 71 bln euros were maturing and the ECB replaced it with 63.4 bln euros.  The Bloomberg consensus was for 75 bln euros.  And the debt crisis, while intensifying in Greece, Ireland and Portugal, remains contained to there, for at least the time being.  This allows the interest rate differential story to continue to carry the day.