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Sunrise Market Commentary: Currencies

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Rates on hold in Japan, rate hike in Australia?

Tue, Mar 20 2007, 09:40 GMT
by KBC Market Research Desk

KBC Bank

• Treasuries drift lower on stock market gains
• European yield curve inverts again
• Rates on hold in Japan, rate hike in Australia ?
• A positive start to the week

Currencies: Rates on hold in Japan, rate hike in Australia?

On Monday, EUR/USD slightly came down as the pair slipped back under 1.33 during the session.

Data were non-existent yesterday, so markets were left with little clues, but looked at the equity markets. As some rebound occurred over there this gave some slight dollar comeback. This was hardly noticeable in EUR/USD though. It’s retreating to the 1.33 area. More dollar gains were seen in USD/JPY (see below).

This morning, EUR/USD also remained stable. The US housing starts today should be the main potential driver here, but the market will most likely await tomorrow’s testimony from ECB’s Trichet and the Fed’s FOMC rate call, especially its statement.

Looking at strategy, we feel that the fact that dollar revival seen early this year has been unwound, is a bad omen for the US currency. Therefore it fits into a sell-USDinto- strength atmosphere for this pair.

The diverging paths for the Fed and the ECB may be an underlying driver, with the ECB speaking out hawkishly and the potential is now present that at one of the coming meetings the Fed becomes more dovish, as US economic data have taken a small downturn recently.

USD/JPY ticked up considerably yesterday, moving from the 116.50 zone to the 117.60 area, as equity market turmoil was put on the backburner.

This morning, the BoJ left rates unchanged as was unanimously expected. The BoJ report noted the economy was expanding moderately, keeping its assessment unchanged. CPI growth is expected to move around zero, but uptrend is still seen. It also said that private consumption has been firm. That was used as the reason for a rate hike last time around.

It will take a longer time for another rate hike in our opinion, with inflation so low and political counter pressure so high. In July upper House elections are held and the bank will most likely not interfere with this, so H2 (end Q3?) ‘07 looks to be the target. BoJ Governbor Fukui gave a press conference this morning but he had little to add, confirming that ‘interest rates would be adjusted gradually in line with the economy and price moves’.

Recently, USD/JPY has been moving in a range, between the lows at 115.16 and the highs at 118.51. Only a break outside these ranges would signal a new direction. Judging by the difficulties of the US currency due to the concerns over the economic growth picture going forward in the US, we must adhere to caution for the dollar. A break above 118.51 though would signal improvement and should make yen longs stop-loss.

A break though looks very difficult ahead of the FOMC, so this event (Fed statement) should be the driver for this pair tomorrow evening.

EUR/GBP ticked down yesterday. As equity market regained some ground, risk aversion ebbed also concerning the sterling carry trade and early movers bough back the sterling. This pushed down EUR/GBP as well, down from the 0.6860 zone to the 0.6830 zone.

Yesterday’s price action is encouraging for our longer term sterling positive outlook. Anti sterling sentiment was too strong short-term and we look for a reversal of fortune. A potential neckline of a double top formation is seen at 0.6818 (see technicals). The recent EUR/GBP upmove seems overdone, as the UK’s economic prospects are solid enough and the rate pickup is still there.

Rate hike talk can still return to the fore, as is evidenced by the very recent developments in Australia were suddenly a new rate hike is on the table, pushing up the Aussie dollar in the process... The euro may also have been over-confident as it was cheered on hawkish ECB comments.

Today is a big day for the sterling, as data are plenty. The February CPI is released, as well as the public finances and the M4 data. Especially the first release is a potential market mover.

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Published on  Tue, Mar 20 2007, 09:47 GMT