Growth in Asia continues to fuel rate hike talks

Despite improving economic data and positive corporate earnings reports, the dominant factor driving the foreign currency market remains investors' focus on negative news:

• Greek Debt Crisis: Bundesbank President Weber warns that Greece might need up to €80 billion in aid and not €45 billion as initially anticipated. Prime Minister Georges Papandreou announced that decision on aid would be taken soon. EU officials said Greece could face pressure to take tougher austerity measures during EU and IMF officials meeting.

• Goldman Sachs fraud: Goldman Sachs is being sued for allegedly being one of the companies that initiated the financial crisis as it made earnings in relation to Collateralised Debt Obligations (CDOs). The problem is still growing as Germany and Britain have sought details of the charge from the Securities Exchange Commission (SEC).

• The economic consequences on European economies of the natural catastrophe and the volcanic ash from Iceland (which caused a delay of discussions between Greece, EU, IMF and ECB which had to take place Monday)

• China: China stands its ground regarding yuan revaluation; US nears decision on currency probe.

Risk aversion has translated in search for the "safe haven" benefiting primarily the Swiss franc, US dollar and the yen. The yen is likely to continue looking to stock markets as the dominant driver of price action; amid another busy week of first-quarter earnings reports and the apparent return of acute uncertainty over the sovereign debt crisis inside the European Union.

Forex markets, in particular carry trades, are likely to remain highly sensitive to risk sentiment. A good deal of carry trades are financed cheaply in yen, tying the Japanese currency to the ups and downs on Wall Street.

The Greek debt crisis and the following bailout fiasco further complicate the risky asset landscape.

Indeed, investors have turned restless once again after the dust settled around the latest European Union rescue plan, with the yield spread between Greek 10-year bonds and those of Germany (the region's benchmark) widening to more than 400bps at the end of last week.

Greek Prime Minister George Papandreou was scheduled to begin a series of talks with EU and IMF officials, the principals behind any bailout effort, on April 19. However, air travel was grounded because of the volcanic ash cloud that covered the skies across Europe and talks did not start until yesterday.

Athens has insisted that it still means to finance its budget shortfall in the markets, but traders will be acutely tuned in to the summit's proceedings for signs that the southern European country will in fact pull the trigger on activating outside aid.

Meanwhile, strong growth in much of Asia continues to boost rate hike talks. India raised interest rates for the second straight month on Tuesday and Australia signalled it may tighten policy further as the region's economies rapidly recover, putting pressure on policymakers to keep inflation in check.

India and Australia are the only two economies from the Group of 20 to have raised rates so far. In Australia, minutes from the central bank's rate meeting earlier this month showed policymakers felt a boom in export earnings meant it could not delay a further hike in rates, leading investors to wager on another rise by June at the latest.

However, many sceptics have criticised the Australian Central Bank for having raised interest rates too quickly (from three per cent end-09 to 4.25 per cent today). Undoubtedly if the anticipated yuan rise against a basket of currencies materialises, the Australians will be hit negatively as China is a very important trading partner for Australia.

Experts believe China which has greatly fuelled economic expansion in Australia could cut its imports on raw materials. China's central bank has already moved to drain further cash from the banking system and clamp down on lending, and analyst expect it to start raising rates this quarter. On Monday, Chinese President Hu Jintao said any reform to his nation's currency exchange rate would be based on China's own economic interests.

Xinhua news agency reported that Obama said the US respects China's sovereignty in determining its currency policy and hoped a solution could be found through dialogue. Comments also came from Safe deputy director Wang Xiaoyi who repeated plans to keep the yuan stable and urged traders to help the government on this matter since the country wouldn't change its currency policy anytime soon.

Finance ministers from the G7 and G20 will meet in Washington at the end of the week on the margins of the spring meeting of the International Monetary Fund (IMF) and World Bank. Foreign exchange is not expected to be a major theme at the meeting. Despite this meeting and steady pressure from the West investors do not believe a move on the Chinese currency is imminent.

By contrast, a much slower recovery in the United States and Europe means interest rates there will likely remain on hold for some time yet. The US Federal Reserve is scheduled to meet on April 27-28 and the European Central Bank on May 6.

Upcoming FX Key events:

Today: European Zone Consumer Confidence, UK Retail Sales & US Existing Home Sales.

Tomorrow: UK GDP, Canadian CPI, US Durable Goods & US New Home Sales.

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Mr Bovay is senior trader at RTFX Ltd.