FX Markets Weekly: The deflation debate and the dollar. FX Outlook: The deflation debate and the dollar When the FOMC and Bank of Japan meet next week, the deflation debate should be as intense as in 2003, when the Fed undertook a mid-cycle ease and the BoJ initiated the most aggressive forex intervention in history. Don’t expect such dramatic actions next Tuesday, since the bars for Fed QE and BoJ intervention are now higher. But since US rates will remain the most under pressure due to deflation, the USD can fall further versus JPY, EUR and CHF. Commodity currencies and high-yielders are false friends in this environment. FX Derivatives USD vols inched higher in JPY and CHF, while cross vols softened in line with rising USD correlations. GBP-cross vols have begun to populate the cheap end of the gamma scale, and long vega there is good value with implieds trading at 18-month lows. AUD/NZD vols and skews are still at the low end of their yearly range, and offer value in bullish directional plays through options
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