NEWS / Foreign Exchange

USD fights back

• Treasuries affected by strong existing home sales
  
• Friday??™s decline deteriorates technical picture Bund
  
• USD fights back
  
• An interesting week ahead

On Friday, EUR/USD retreated further dipping from the 1.3320 zone to the 1.3270 area. This morning, the pair even fell to the 1.3260 zone.

To be honest, we are a bit surprised by this turn in events. Thebreak to new year highs should have been a clear dollar negative, as itcame at a time the Fed dropped its upward bias for a moreneutral one and in reality this even opened the path to a rate cutduring the Summer? At this same time, one could argue the ECB was stilltalking hawkish.

But apparently the market has some concerns on that front. The EMU is not an island anda slowdown in the US should affect it as well, so the ECB may be donesooner rather than later as well. The first business confidencemeasures in Belgium and the Netherlands deteriorated, showing a loss ofmomentum. Tuesday??™s German IFO indicator will be the touchstone now.Besides, the euro zone finance ministers could give some declarationsabout the single currency as they prepare for the April G7 summit inWashington.

Still, we wouldn??™t be too negative on the euro. The ratedifferential outlook should continue to come in for now so this shouldbe a euro positive development. The USD also never quite likes the idea of an economic slowdown,while the euro often plays the role of safe haven. The upside couldstill be favoured in a buy-euro-on-dip scenario. A move below 1.3260,the previous high, would deteriorate the euro ST picture though??¦

USD/JPY on Friday showed two faces. At first, the yen tried to strengthen, but this couldn??™t be maintained. In the afternoon the existing home salescame out better than expected. Sales rose by 3.9%. This helped thedollar on the day as housing markets concerns are big and thus helpedto clear the air.

We wouldn??™t exaggerate though, as the inventories of unsold homesrose too and the federation of realtors expected the subprime problemsto slow down sales in the future. Today??™s new home sales is another indicator in this field.

Meanwhile in Japan, BoJ governor Fukui keeps emitting mixedsignals. This morning before parliament he stressed the importance ofkeeping rates not too low for too long. This is merely lip service tothis cause, as at the same time he repeated his stance of ???maintainingthe easy monetary policy??™. This should be the case until after theUpper house elections of July, so as not to interfere with thepolitical process or become a target of politicians campaign.

In these circumstances it may be difficult to USD/JPYtaking a clear path: the USD is less strong because of the US economicworries, while the yen has no rate support whatsoever. The ratedifferential stays too wide for now to frighten off carry traders. Amove above 118.51 resistance would be a bad yen omen in this respect.

This weekend??™s earthquake in Japan (6.9 Richter scale) has no visible impact on FX.

The EUR/GBP pair continued to move slightly lower. On Fridaythis translated into a move from the 0.6780 zone to the 0.6770 area.This morning this pair even dipped to the 0.6760 zone.

The euro will be keen to find out the result of Tuesday??™s IFO,as concerns of loss of momentum also have emerged in the EMU. Moresigns of a slowdown would push EUR/GBP further down. The neckline of aHead & Shoulders formation is currently under a serious test at the0.6770 zone! (see technicals for details)

We are sterling positive as the CPI is too high andindicators such as the retail sales and the CBI industrial trends havebeen rock solid over the past month. The fact that one member of theMPC, Blanchflower, voted for a rate cut, is not impressive, as we seehim standing out of the flock. Hawks could go on a (counter) offensivebased on the latest data.

We feel the market has been too negative on the UK and the sterlingand maybe too positive on the euro zone. That is why we see a comeback story for the sterling in the making versus the single currency.