USD: Volatility starts here?

The start to this week has been very quiet (at least in FX terms) but last night saw a number of significant developments that I would expect to increase the activity and volatility levels across the board.

Fed on hold
The USD was given a boost in the late New York session yesterday as the minutes from the last Federal Open Market Committee meeting highlighted that support for further easing in the form of a third round of quantitative easing (QE3) does not have anywhere near the requisite support for implementation at this juncture. With just a couple of members voting for further money printing at this stage and a further couple advocating its adoption should the upcoming data deteriorate, the majority appears to need a considerably higher hurdle (lower growth or exogenous shock) in order to restart the printing presses than the pedestrian growth and job creation momentum currently present in the US, sentiment I have espoused on a number of occasions.

BoJ disappoint
In Japan, the Bank of Japan left rates unchanged as expected but tweaked the short-term asset purchase programme, which will see it add JPY 5 trillion of Treasury Bills. However, as has so frustratingly been the recent theme of BoJ action (for those JPY bears at least), they subsequently offset the ‘modest’ effort by reducing the credit loan programme. JPY weakness remains a story for another day.

Australian employment
Australia, however, I believe the story is for today. Disappointing employment data overnight has taken the shine off the AUD which has outperformed over recent sessions. The data which highlighted a fall in employment, a fall in the participation rate, a fall in hours worked and a fall in the full-time component of overall employment is a clear negative (Australia’s labour market has been a clear positive in recent months). At this juncture of rising economic uncertainty, the waning positive impact of the Spanish bank bailout and EU summit accords, in addition to growing concern about the Chinese growth trajectory, it may be time for AUD to catch up with the decline in its terms of trade and see the USD gain the upper ground below parity. A weak EURUSD may add to the downside momentum of AUDUSD also in this environment.

Bank deleveraging
Another point worthy of note in terms of EURUSD is the announcement from the European Banking Authority (EBA). Five months ago the EBA warned that over 30 banks required a significant amount of capital between them in order to meet their 9 percent core tier one capital target. Yesterday the announcement suggested that bank capital had increased by an aggregate of EUR 94.4 billion. On the face of things this could be viewed as a positive for the region and at the margin is certainly a positive for the individual banks. However, over the past few months there have been many commentators (including me) suggesting that EURUSD should be a lot lower. It is possible that the capital raising (which will likely have included the disposal of non EUR assets and subsequent repatriation) could have placed a large bid in EUR that kept it higher than it otherwise would have been. Indeed it could also go some way to explaining the recent breakdown in correlation between the EUR and peripheral bond yields. Either way the removal of the (urgent) Eurozone bank bid for EUR (whilst already likely has been an impact from 1.27 to 1.22) could aid further declines.

Today
Protests in Spain also highlight the socio-political volatility of the Eurozone task at hand and for the short term at least I would expect that this will only get worse. With little on the data calendar today I would expect sentiment and rhetoric to dominate, but it may take something unexpected to reverse the current positive mood of the USD.