Trouble is brewing across the English Channel and the Atlantic Ocean as the US and UK have come out strongly against a draft EU directive, proposing tighter financial regulations on hedge funds and private equity industries. The proposal is hot on the heels of the Franco-German initiative to ban speculative trading in credit default swaps, which is thought to have aggravated the debt crisis in Greece. While currency markets appear relatively unperturbed by the news, the execution of the proposed financial regulations could have systemic implications triggering spurts of risk aversion in the future. For now the EUR is trading steadily against the USD, buoyed by the prospect of EU intervention should Greek borrowing costs continue to rise. USD/ZAR however is floundering at 7.42, following several days of consistent gains, partly due to aggressive purchasing below the USD/ZAR7.40 level. Though US trade data poses mild event risk, it should not provoke extreme volatility. We therefore expect USD/ZAR to continue to trade in a 10c – 15c range.

While the proposed financial regulations remain the focus up north, monetary policy is the order of the day in other parts of the world. China’s central bank is likely to raise the reserve requirement on banks relatively soon given a barrage of strong economic data, including a 2.7% y/y increase in inflation and 46% rise in exports. Bias is still in favour of another 25bp rise in the Reserve Bank of Australia’s target rate, even though poor local employment figures trimmed the possibility of a further rate hike. The AUD’s yield advantage over the NZD is likely to be sustained as the RBNZ kept rates on hold and indicated that rates could peak at levels lower than previously thought. The AUD should continue to prosper as a result of RBA tightening.

THE CROSSES

• Fitch’s unfavourable assessment of Portugal’s credit rating prevented the EUR from gaining momentum yesterday. Although the unit is fixed above EUR/USD1.36 it is vulnerable to further weakness due to persistent fiscal challenges present in countries on the periphery of the Eurozone. This is likely to drive EUR/ZAR below 10.00
  
• Downside pressure on GBP has intensified following a sizeable decline in UK manufacturing output in January. GBP/ZAR is edging ever closer to 11.00 as a result and could easily pierce the level today if GBP/USD were to fall below 1.49.
  
• ZAR/JPY’s uptrend should sustain given mild JPY weakness against the USD in the run-up to the BoJ’s policy meeting next week. The likelihood of further BoJ easing increased following weak machinery orders, which offset marginal JPY gains attributed to the repatriation of funds ahead of Japan’s financial year ahead.