Lower volatility pumps more air into carry trade strategies. Here, the dollar does OK since it offers the highest short-term deposit rate in the G10 space. The New Zealand dollar and British pound should also out-perform in this environment, although the pound faces an event risk from Thursday's Bank of England meeting, and we'll get to that shortly.
At the other end of the spectrum remains the Japanese yen. Low volatility and very low Japanese interest rates continue to see the yen as the funding currency of choice. Additionally, US Treasury Secretary Janet Yellen's comments that FX intervention should be 'rare and in consultation' have not helped Tokyo's efforts to stabilise the yen. It looks like this friction will be with us for some time and the market will test Tokyo's resolve by pushing USD/JPY back into the 155/156 area.
A very quiet US calendar this week, USD/JPY drifting higher, and perhaps some dovish developments in Europe (we're looking for a Riksbank rate cut tomorrow) should keep DXY supported this week, which may head back to the 105.50/75 area.
Seagull EA
Leave Your Message Now