The EUR/USD pair went for new (marginal) highs in the morning at the 1.4740- 50 zone, but couldn’t sustain these. The pair was extremely overbought and profit taking kicked in.
Also, we feel that risk aversion as a story is not a euro positive story per se at this moment in time. This should be more a yen positive. As EUR/JPY even is a very volatile cross; the decline in this cross can have quite a negative impact on EUR/USD too. We believe that is what we saw last Friday. EUR/USD fell back to the 1.4650 zone…
Is this the top for EUR/USD short-term. We warned for the implications of Trichets’ historic words on Thursday. As he labelled the euro rise as ‘abrupt’ and said ‘brutal moves are not welcome’, the market received a very strong warning shot. At the same time, the Japanese do not seem worried yet about a rebounding yen. The yen may thus rise for the first time in many years by default…by lack of a better choice. Fear is good for the yen.
Today, trading could calm down somewhat, as the US is closed in observance of Veteran’s Day. The BIS meeting may yield some interesting headlines on FX. Watch out also this week for the EcoFin meeting for an EMU viewpoint on recent developments.
USD/JPY slipped quite fast on Friday, ticking down from the 112.50 zone to the 110.560 zone. This morning the bleeding continued, reaching the 110 mark.
The financial worries continued on Friday, with some attention for the liquidation scenario of a State Street CDO and more bad news from the likes of Wachovia, with a potential loss of 1.7 B $ on mortgage related debt and warnings from Banc of America and JP Morgan Chase for the 4th quarter earnings.
In this new flow it is obvious that risk aversion is heightened, so this is good news for the yen. As the pair has slipped in a technical bearish picture, we would see more downside potential for USD/JPY. Also in other crosses the yen rebound was very much apparent. Cary trades in this sentiment are also being unwound.
Japan’s spokesperson Machimura had some interesting remarks saying that a strong yen was good for Japan’s assets and the government had no plan to intervene. In Japan the Ministry of Finance holds to right to order central bank intervention on the FX markets. This is seen a yen positive news that the government isn’t worried about recent ye strength and is not talking to hold it back.
News overnight that the Super Fund has finally emerged to buy troubled assets and the words of Gonzales-Paramo that the ECB will continue to help the money markets have not yet affected the risk aversion it would seem.
EUR/GBP was pushed up higher in a feverish mode last Friday as the rumour grew that UK bank Barclays was going to announce a 10 B $ write-down due to subprime woes.
The market regarded this as proof that the US financial turmoil had spread once more to the UK and the sterling was the victim. EUR/GBP ticked up from the 0.69 to 0.7020 zone. The bank later denied this, but it was too late for sterling sentiment. The market is now really scared as UK banks start reporting and now HSBC is named as a potential victim…
We looked for sideways trading between the 0.6890 and 0.7030 zones, so we had bought back sterling above 0.70. This morning however the pair ticked up further to the 0.7040 zone. We were forced to stop-loss out of this trade, as the recent highs at 0.7030 were broken. We are sidelined for now.
