Choppy Price Action in FX

There are a couple of standout developments in the FX market today.

First, the yen has strengthened and now the dollar is trading below JPY80.  This is the lowest level since the coordinated intervention back in March.  However, the move is orderly and volatility is only slightly firmer, but well off the pre-intervnetion levels.  I understand the purpose of the intervention was to address volatility not a specific level.   Therefore intervention is unlikely.  QED

Second,  UK and Germany reported disappointing data.  For the UK it was the third weak PMI this week.  The service PMI fell to 54.3 from 57.1 in March and expectations of 55.7.  A rate hike seems decreasingly likely.  In fact, with the more than 4% decline in sterling on a trade weighted basis since late Feb and the decline in interest rates (the June short sterling futures implied yield has fallen roughly 30 bp over the past month) monetary conditions, broadly understood have eased in the UK not tightened. 

Germany reported an unexpected 4% decline in March manufacturing orders, led by a slump of 4.3% in foreign orders.  Domestic orders fell 3.5%.  The euro came off on the news.   The $1.4950 area is thought to contain a large option structure. 

However, a mitigating factor may be that the slump in orders may reflect the lunar New Year and the disruption of Asian markets. 

Spain's bond auction saw lukewarm reception.  The rate was about 15 bp above the March auction and the bid-cover was a bit softer.   Yet this does not appear to be a rec-coupling.  Spanish 10-year yields, for exmaple are up 4 bp today, while Greece and Portugal yields are up 11 and 15 bp respectively.  

ECB press conference is the key event today.  I suspect Trichet will not signal a rate hike in June through his usual word clues.  Not signalling June does not necessarily mean July, but that is what the markets will conclude.  Any disappointment with Trichet will likely be short-lived.  The ECB will still be expected to raise rates agian before the Fed's balance sheet shrinks.