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Why the Flip-Flop in Currencies?

Monday, 25 Feb 2013 | 12:54 PM ET
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If you were expecting calm in the currency markets this week after a rush of news over the past several days, you're likely to be disappointed.

For starters, the usual month-end round of economic reports is coming. "Friday is the big day with PMIs, flash euro area February inflation, U.S .auto sales and January personal consumption and income figures," says Marc Chandler, chief currency strategist at Brown Brothers Harriman.

Well before Friday, the results of the Italian election will likely become clear. At the moment, former Prime Minister Silvio Berlusconi is showing surprising strength, but that's counter to what the polls were predicting, so uncertainty is in the air.

There are also rumors about the likely new head of the Bank of Japan. News reports are saying that Asian Development Bank President Haruhiko Kuroda, a proponent of strong monetary easing, will probably get the nod.

The deadline for a deal to avert sequestration is looming in the U.S., with few signs that a deal is imminent.

Then there is the matter of investor positioning, where a kind of do-si-do seems to be taking place.

"Currencies that have been relatively in favor and out of favor in recent trading sessions have largely swapped positions," says Samarjit Shankar of Bank of New York Mellon. "The U.S. dollar has started this week on the back-foot, while the steady euro outflows witnessed last week have completely dried up. The Canadian dollar is now the strongest net bought after having reached its lowest vs the USD since July 2012."

All in all, it's shaping up to be an interesting week in forex.

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