NEWS / Foreign Exchange

FX market all locked up

• US Treasuries cannot find their composure
• European bonds remain under downward pressure
• FX market all locked up
• Oil (and commodities) fighting back?

On Thursday, the EUR/USD pair ticked slightly higher, moving from the 1.3310 zone to the 1.3340 area. This is still within very recent boundaries (week high at 1.3370 zone).

The market appeared to be digesting the words of Fed chairman Bernanke the prior day. At that time, he made it clear that he wasn??™t ready for a rate cut and was still concerned about inflation. This was a dollar positive message as such, but apparently doesn??™t make a lasting impression, as we come close to the pre-Bernanke speech levels.

We continue to worry about the US economy, with mostly softer data this week. The upwardly revised Q4 GDP is in that respect a non-event, as the market is forward looking. The situation with Iran is also a risk and could signal market players to wait and see instead of buying USD.

Today, the calendar is well filled, with EMU CPI, confidence data and German retail sales. In the US, the PCE deflator and Chicago PMI numbers will be followed.

The EUR/USD upside could still be favoured in a buy-euro-on-dip scenario. This is kept in place as long as the pair can manage to stay above recent lows at the 1.3260 zone.

USD/JPY rose slightly yesterday, continuing the jojo-like movements. The pair went up form the 116.80 zone to the 118 area.

The end of the fiscal year is today in Japan. Some traders apparently wanted to pre-position for this, expecting that all flows into the yen had past already, going dollar long and pushing USD/JPY above 118. They were caught off guard though by some last minute repatriation flows and this pushed USD/JPY lower this morning to the 117.50 zone. If this move is indeed related to repatriation flows of Japanese companies, we would expect this to be rather temporary.

A Chinese top think tank has called for a more flexible yuan to fight off excess liquidity. This may indicate a faster yuan appreciation for this year and should be of some help for other Asian currencies versus the USD, including the yen. This may have helped this morning, although it seems a more longer term issue.

The Iran/hostage crisis is still ongoing, making the market including the yen a little bit more risk averse than before. Such pattern of risk aversion often only lasts for as long as the market becomes used to it. Only a further escalation will help the yen.

This morning, Industrial production dipped less than expected, falling back by 0.2%M/M (-0.8% M/M consensus). The Japanese nationwide and Tokyo core CPI data showed a decline of 0.1% Y/Y.

What is interesting is that Japanese politicians which have always continued to wonder whether deflation had ended or not, now are inclined to say that deflation had ended, despite these numbers. This, quite ironically, signal us that the politicians are not afraid of a BoJ rate hike anytime soon. We would guess a rate hike is postponed until after the summer elections.

The recent USD/JPY price action again confirms the sideways stance for the pair, as we see more action between the high at the 118.50 zone and the lows at the 115.16 area. Monday morning??™s Tankan report will be a main influence for this pair.

The EUR/GBP pair ticked slightly higher in the course of yesterday??™s trading. The European session had started at the 0.6780 zone, but the pair closed at the 0.6790 area. These are small movements though in directionless trade as we??™ve seen for several days now.

We hold on to the view that the FX market has been too negative on the UK economy and the sterling. The eco data this week have been mostly on the stronger side of expectations. This was again the case yesterday with the CBI distributive trades report. The sales balance of this report rose to 32, the highest levels in over 2 years.

If the Iran story is allowed to cool down, this could result in a small sterling rebound. Upticks in EUR/GBP above 0.68 seem like a buy-sterling-on-dip opportunity. For now the crisis is still making headlines and it is making markets nervous (oil e.g.). Iran put off the release of the female UK military captive, as result of London??™s ???wrong behaviour??™. An end to this crisis doesn??™t seem immediately in sight??¦