Interest Rates, Sovereign Debt and Event Risk

Includes: AUNZ, FXE, UDN, UUP
by: Forexyard

This week's trading is highlighted by a mix of potential monetary policy moves and sovereign debt risks.

The dollar bloc central banks of Australia and New Zealand are due to meet this week. The former (RBA) is expected to keep interest rates on hold but may perhaps surprise the market with a signal to increase rates in the near term. The latter (RBNZ) is forecasted to hold rates steady and not signal any near term changes to monetary policy.

On Wednesday both the Bank of England (BoE) and the European Central Bank (ECB) will hold their respective press conferences. The BOE will not be making any adjustment to the interest rate nor to the Asset Purchase Facility as the central bank will most likely attempt to delay raising interest rates as long as possible in order to aid the ailing British economy. On the opposite side of the spectrum ECB President Trichet will likely signal a rate increase to come in the following month. This event will most likely be the highlight of the trading week event risk runs high. Traders should remember the March 5th ECB press conference where Trichet failed to use the expected wording and the EUR/USD began to unwind from its 17-month high.

The interest rate story will be the headline event but the European sovereign debt crisis has only temporarily been put on the back burner at many of the major forex trading desks. While a temporary deal looks to have been cut between the EU/IMF and Greece in order to stave off a default in July, the parties continue to negotiate a potential restructuring of Greek sovereign debt.

The political winds have shifted in Portugal as the incumbent party looks now to form a political coalition. This development has Portuguese sovereign debt yields easing from highs last week.

Turning to the U.S., last week's dismal non-farm jobs report and increased unemployment rate underscores how slow the U.S. economic recovery is progressing. Talk of QEIII was in most of the major financial newspapers over the weekend as economists and talking heads weigh the odds given the political headwinds the U..S faces going into an election year and the flack the Fed took with QEII. Moody's note last week warning on the U.S. debt rating also puts increased pressure on the president and Congress to come up with a potential solution to the deficit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.