3 Lingering Questions Weighing Down Major Currencies

The euro and British pound are trading slightly higher against the US dollar this morning, but persistent uncertainties in Europe have limited the move in currencies. As long as the makeup and policies of Italy's government are unclear, the euro will have a tough time recovering, even if Italian bond yields have fallen from their highs.

Today's successful bond auction in Italy is very good news for the euro because it indicates that the elections did not completely scare investors away from Italian assets. Even Italian stocks are trading higher today.

Nonetheless, investors will not be rushing back into the euro until they know what type of coalition is formed in Italy and whether new elections need to be held. According to the latest headlines, BeppeGrillo doesn't plan to throw his support behind Pier Luigi Bersani, which doesn't make things easier, but the stronger Eurozone confidence numbers have lent a bit of support to the currency.

Still Awaiting Nomination of Next Bank of Japan Governor

Uncertainty is also keeping USDJPY under pressure. We are still waiting for Prime Minister Shinzo Abe to announce his nomination of the new Bank of Japan (BoJ) Governor. Abe’s government previously indicated the decision needs to be made this week, otherwise, it would be too late to elicit support for the candidate before the current BoJ head, Masaaki Shirakawa, leaves office on March 19.

Until the announcement is made, which we expect to be within the next 24 to 48 hours, USDJPY may have a tough time recovering. It is clear that Japanese yen (JPY) traders are desperate for a fresh catalyst, and we believe that nomination of Haruhiko Kuroda as BoJ Governor and ultra-dove KikuoIwata as one of his Deputies could be enough to renew the rally in USDJPY.

US Sequester Uncertainty

In the meantime, durable goods and pending home sales are scheduled for release in the US. Durable goods fell 5.2% in the month of January, but the majority of the decline was in transportation orders because, excluding transportation, durable goods rose 1.9%, which was the strongest rise since October 2011.

Pending home sales were expected to rebound, which would be consistent with the strength seen in new home sales and the steady recovery in the housing market.

Fed Chairman Ben Bernanke will be continuing his semi-annual testimony again today before the House. Day 2 of the testimony usually has a less impact on the markets than day 1. The “Sequester” is scheduled to happen at the end of the week. According to Fitch, "implementation of the spending cuts—sequester—and government shutdown would not prompt a negative rating action," however, "failure to raise the debt ceiling in a timely fashion could prompt a review and likely downgrade of the US debt rating." The uncertainty around the Sequester is also limiting enthusiasm in the US dollar.

By Kathy Lien of BK Asset Management

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