NEWS / Foreign Exchange

Yen Weakens Further on Carry; Euro Slide Stemmed By Better Confidence Figures

Talking Points

??? Japanese Yen: BOJ Minutes reaffirm steady as she goes monetary policy
??? New Zealand Dollar: Trade Balance deficit shrinks considerably
??? Euro: Better French Confidence data stems slide
??? US Dollar: New Home Sales on tap

Yen Weakens Further on Carry; Euro Slide Stemmed By Better Confidence Figures

The start of the week provided no respite to yen longs as the currency once again came under pressure after tonight??™s release the BOJ minutes. The minutes essentially reaffirmed the Japanese central bank??™s steady as she goes stance with some members continuing to focus on the country??™s lackluster wage growth and weak private consumption. This week the JPY calendar carries Retail Trade data and employment figures ??“ both of which should provide more guidance to policymakers. In general, unless the data shows some strong upside surprise, chances of any more rate hikes before the Japanese parliamentary elections in the summer appear exceedingly dim. Thus, with no support on the interest rate front and with risk aversion apparently still not a concern to the market despite the escalating Iran-UK standoff yen was sold in early European session today with USDJPY reaching 118.25.

The EURUSD did not fare much better as the pair remained weak after Friday??™s sell off on much better than expected US Existing Home Sales numbers. Today, US sees the New Homes Sales figures and if that report prints at a better then 1M annual run rate the euro could see additional selling with traders targeting the 1.3200 level. The state of US Housing is the key issues in the current battle between dollar bulls and bears. Although over the week-end many analysts pointed out that the Existing Home Sales number may have been misleadingly positive as the data was recorded from transactions completed before the sub-prime problem became well known, for the time being the market has chosen to believe the upside scenario and if today??™s New Home Sales rebound, the release will only serve to reinforce that point of view.

Meanwhile, the euro is experiencing its own doubts, as traders fear that higher exchange rates and a sharp decline in German consumption after the hike in VAT at the start of the year may erode business confidence. Last week Belgian Business confidence survey dropped from 3.6 to 1.5. Since Belgium does 95% of its trade within EU the survey is often used by traders as a proxy for the much more important IFO reading due out tomorrow. Although there has been deviation between the two surveys over the past few months, the sharp drop in the Belgian Business confidence may suggest that the high euro may be starting to take its toll on EZ business. Tonight however, French Business confidence and Production outlook both beat expectations, putting a stop to euro slide for the time being.

Finally the kiwi started the week with a whipsaw session, first diving 30 points in less than 10 minutes on carry liquidation sales at the start of the Asian trade, only to rally steadily higher for the rest of the night after news that the country??™s Trade Balance contracted far more than market forecast shrinking to ??“127B from ??“250B consensus. The reduction of the deficit was caused more by a slowdown in imports rather than any growth in exports, but the markets focused strictly on the positive headline number, anticipating that RBNZ will be forced to hike it rates even higher in the near future. At 7.50% New Zealand already carries the highest interest rates in the industrialized world and any further increase by the RBNZ would likely bring more carry trader buyers to the currency.