Tuesday, March 2, 2010
"...traders are focusing on something else, namely the long-term interest rate differentials between the US and Europe as an indicator of where the currencies should be trading against each other.
The relationship between 10-year German Bund yields and US Treasuries grabs the attention of the currency market from time to time. The reason this is happening now is because of the divergence that is emerging between the monetary policy of the US Federal Reserve and that of the European Central Bank.
"The currency market starts paying attention to this yield relationship whenever there are contrasts in central bank expectations," says Ashraf Laidi, chief market strategist at CMC Markets.
He says this is the currency market's "money play": the ECB needs to keep supplying liquidity as worries about fiscally weak countries on the eurozone periphery weigh on market sentiment, while the Fed has started talking about its exit strategy from easy monetary policy..."