NEWS / Foreign Exchange

EUR/USD cools down

• Treasuries hit by profit taking
• European yield curve re-steepens, as long end underperforms
• EUR/USD cools down
• Markets express confidence in the Bernanke put

EUR/USD took a step back yesterday. Recall that a breakthrough was made during Wednesday??™s late trading. The Fed had changed quite a few things to its statement, as it went to a more neutral stance.

This scared the daylights out of the USD believers and EUR/USD broke above the 2006 highs at the 1.3360 zone and even surged above 1.34 for a moment.

Yesterday it proved that these levels were too high to maintain for now, as the pair fell back to the 1.3330 zone. The pair is still in that area this morning.

We do keep a dollar negative view at this stage. The Fed statement Wednesday confirmed we??™re in for a period of at least steady rates, with even a risk if the economy slows down further, for a rate cut in the summer.

There could be more dollar softness to come near-term and therefore we continue with a sell-USD-into-strength approach, as we look for more upside in the EUR/USD pair.

Today, only existing home sales can make a difference though on the data front, but the market will also be watching a battalion of ECB and Fed speakers on the agenda for clues.

USD/JPY rose from the mid 117 area to the 118 area yesterday. The (aftermath of the) FOMC statement didn??™t have a major impact in USD/JPY as this pair seems still caught in a sideways spin.

The cooling down of jitters on the equity markets has taken away the wind out of the yen sails apparently short-term. That is why these opposing conflicts, as also the USD is not emboldened by the Fed, should see a continuation of the sideways pattern.

The strong boundaries should be the recent lows at 115.16 and the recent highs at 118.51. Only a move outside these boundaries would signal a new trend.

If pressed, we stick to out longer term concerns for the USD as the economy appears to be cooling down and this could lead to rate cuts further in the year. On the other hand, Japan is still in a tightening cycle, albeit at a painfully slow pace. This coming in of the rate differential should make the USD no longer an option for carry trades.

These may be longer term views, while we have seen a sideways picture in USD/JPY for the moment. Still, we have to adhere to some buying yen on softness approach, as we feel that USD/JPY shouldn??™t be allowed to sustainable break the 118.50 zone.

By the way, we see further signs of longer term normalisation in Japan as land prices for the first time since 1991 rose again, by 0.4% Y/Y in January. Other real estate parameters have already turned positive last year, showing that the aftermath of the equity bubble explosion have finally been digested after many years.

The sterling has been pushed back and forth over the past days. At first the higher than expected CPI gave the sterling wings for a comeback, but these wings appeared to be cut off when the very next day the BoE Minutes of the last meeting showed 8 members had voted to keep rates on hold and one (Blanchflower) had voted for a rate cut. This hurt sterling sentiment at that time.

But the sterling has digested this, as the Minutes were done ahead of the latest CPI figure and everybody knows by now what a dove Blanchflower is. EUR/GBP even edged somewhat lower yesterday, moving from the 0.6800 zone to the 0.6780 area, as the UK retail sales jumped 1.4% M/M in February, restoring the upward trend in sales after a poor January reading. The CBI industrial trends survey also pointed to a very healthy situation indeed for the sector (12 year high in orders balance).

We feel the market has been too negative on the UK and the sterling and maybe too positive on the euro zone. This was highlighted yesterday by the ongoing decline in the Belgian business confidence, which shows that the momentum in the euro zone may be waning.