The EUR/USD pair continued its down-move in yesterday’s trading. This correction started on Friday. Fresh financial turmoil and poor US data on Friday couldn‘t push the USD to fresh lows against the euro. The dollar was oversold versus the single currency. The risk aversion theme since profited more to the yen. Question is whether this can continue (see USD/JPY part below too).
The EUR/USD pair slipped from the 1.4650 zone to the 4540 area by the evening. Very early this morning, fresh lows were set at teb1.4520 zone, but then a rebound came and the pair currently stands at the 1.4580 zone. Now it is time for the dollar bears to show their resolve. Has the correction gone far enough or has this been a trend reversal?
We warned for the implications of Trichet’s historic words on Thursday, as he labelled the euro rise as ‘abrupt’ and said ‘brutal moves are not welcome’. This is a serious warning shot. Yesterday, EU’s Juncker stepped in to stand shoulder to shoulder with Trichet, as he said that Trichet’s remarks were right. This is capping the euro we feel.
As German bank West LB late on Monday issued a profit warning, due to it structured credits, this shows that the pain is still being felt in the EMU too, so this could hold back the single currency.
Today, the US calendar is not that hot, but some attention should go to the situation on the US housing markets with the pending home sales for September late in the session.
From the EMU side, attention will go to the German ZEW economic sentiment survey for guidance.
USD/JPY slipped yesterday from the 110.40 zone to day lows at the 109.30 zone, but the bleeding stopped and things stabilized. Equity markets seemed more stable. A late session decline on Wall Street brought back the yen to near day strengths at the mid 109 zone.
This morning the yen lost some ground though on comments from Japanese Prime Minister Fukuda. He said the yen is appreciating ’too fast’ and speculators needed to ‘be careful’. This might point to the possibility of intervention.
We would also focus on other comments he made, which are new: he said ‘In the short term, yen appreciation would certainly be a problem. Any kind of sudden change would not be desirable. But from a long term perspective, I think a rising yen should not be rejected. I stress long term’.
We feel this indicates the changing tide we had noticed on Japan. The market may be scared off by his first comments, but should still feel yen supportive, as the Japanese policy makers seem to be able to live with more yen appreciation. Intervention, except in words, should be far off still.
We see more chance on a further yen rebound in a buy-on-dip-scenario.
This morning the Bank of Japan kept rates in hold at 0.50% as expected. Data showed that the Japanese economy grew more than expected, at 0.6% Q/Q. this was thanks to strong exports and capital spending.
EUR/GBP continued its upward momentum, ticking up from the 0.7040 zone to the 0.7060 area, as the market as lost its appetite for the UK currency.
This morning, the RICS housing price balance was weak, at -22.2 (consensus at - 20.0), the lowest since July 2005, giving of course no support to the sterling.
We looked for sideways trading between the 0.6890 and 0.7030 zones last week. The move above 0.7030 has made us eject out of sterling long positions, set up at the 0.70 zone. We now stand sidelined.
