NEWS / Foreign Exchange

EUR on the attack

• Treasuries in wait-and-see mode
• European bond market to keep a close eye on the euro
• EUR on the attack
• Slovak koruna revaluation by 8.5%

Currencies: EUR on the attack

Last Friday, the news of the day undoubtedly was the breakthrough forced in EUR/USD. In early Asian trading, the pair surged higher, as renewed Asian stock market jitters were seen at the open. The USD didn??™t feel well and the euro profited this time around. The pair moved above the 1.33 mark to fresh year highs.

Needless to say that this is an encouraging development for the single currency, which can now start to look at testing the 2006 highs at the 1.3360 area. That seems the obvious target. It is striking that the dollar revival seen at the start of the year has now been completely unwound. It has to be disappointing for the dollar believers.

This must be a buy-euro-on-dip situation.

The dollar has been under siege form several angles. The divergent stances of the central banks is of importance, with the Fed now seen more at risk of looking down, as equity market turmoil may push the Fed closer to a rate cut, while the ECB seems to be sticking to its hawkish approach, looking at comments just last week.

Today, the calendar is still calm. Things heat up during the week with US housing data and Fed rate decision. These could set the tone. The dollar desperately needs good news, but the question is whether it can get it.

USD/JPY dipped slightly on Friday, from the 117 area to the 116.50 zone, as the US data couldn??™t dismantle market doubts on the US economy and US equities ended the day in red, albeit only slightly.

Monitoring equity sentiment remains one of the key elements in this pair, as the yen would likely benefit from renewed equity jitters. This morning though, the Nikkei rose more than 1% and this caused some short-term profit taking on the yen. Earlier on in the morning the yen still felt somewhat supported as Chinese policy rates were upped for a third time in a year (PBOC lending rate up by 27 bp??™s to 6.39%), but as this was shrugged off by Chinese equities, instead rising sharply, the impact on Japan also evaporated.

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 general 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.

Therefore the highs in place should provide decent resistance. The 118.50 zone should be too tough to crack as long as doubts persist. Housing data and the Fed comments this week (following Wednesday??™s FOMC meeting) should be the guiding factors short-term. This week also the Japanese data will play a role with the BoJ meeting and Fukui comments on Tuesday morning.

EUR/GBP is sticky near the recent highs at the 0.6860 zone.

Now two weeks ago, we were stopped out of sterling long positions, as EUR/GBP rose higher than we had anticipated. Anti sterling sentiment seems be reigning for now; we have to wait and see for it to blow over before installing any sterling longs.

We do see merit in sterling, as this EUR/GBP upmove seems overdone. The UK??™s economic prospects are solid enough and the rate pickup is still there. The BoE will still be worried by the steep house price rises, again confirmed by the Rightmove house price index (+1.5% M/M in March, vs. +0.9% M/M prior month, to be up 12.2% Y/Y) this morning.

The euro may have been a bit cheered on though by recent ECB comments, but this effect should ware off. The current sentiment is very much against sterling, but this will not last indefinitely. The current up-move is too steep to be maintained for a longer while without at least a solid correction to the downside in EUR/GBP. We still look for that.

This week, the UK CPI (Tuesday), UK retail sales and Trichet??™s testimony (Wednesday) should be the highlights.