NEWS / Foreign Exchange

EUR/USD still below recent highs

• US Treasuries cannot find their composure

• European bonds extend losses

• EUR/USD still below recent highs

On Friday, the EUR/USD pair seemed to be edging slightly lower on the day, as US data were somewhat reassuring. The Chicago PMI showed an unexpected surge to 61.7 from 47.9 the prior month. The release is however volatile and it is difficult to draw conclusions for today??™s ISM. The ISM is expected to decline slightly from 52.3 to 51.1. EUR/USD on Friday dipped to day lows at the 1.33 zone.

But that wasn??™t the end of the session??™s story. A rumour emerged that the US was calling on all its citizens in Bahrain to leave the country. This would be seen as a measure of safeguard as the conflict with Iran escalates and the risks increase. This was interpreted of course as a dollar negative and EUR/USD spiked to the 1.3390 zone. This was later denied and the pair fell back somewhat, but the underlying concerns didn??™t abate so fast and we still stand in the 1.3360 zone this morning.

On Friday, the EMU economic confidence rose to a new cycle high in March at 111.2 up from 109.7 in February, while the business climate indicator stabilized at a high 1.55. The confidence indicators confirmed that the euro zone economy has maintained its strong growth momentum. This is euro supportive.

Today, the calendar is well filled, with as mentioned the US ISM manufacturing report, but also its EMU counterparts are released, giving some additional guidance for EUR/USD earlier in the session. EUR/USD upside should still be favoured in a buyeuro- 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 is still keeping its sideways picture intact.

The Iran/UK crisis is still ongoing but its impact on the currency markets seems to be waning, unless there is fresh news: the rumour of US citizens being evacuated out of the region caused some dollar weakness on Friday, with USD/JPY slipping from the 118 zone to the 117.20 area, but as this was denied, the USD managed to claw back slightly.

In this fashion the USD/JPY pair remains capped by the 118.50 zone, an important resistance in this pair, so the sideways picture between that zone and the 115.16 area remains in place. Range trading appears to be the name of the game for now. A break above 118.50 would signal stop-lossing in yen longs.

This morning, the Japanese Tankan report on business confidence showed a slight decline in this confidence, but nothing too worrying, as the main index slipped to +23 from a two-year high at +25. Moreover, the large firms continue to plan increased capital spending by +2.9% in 2007, so this is a good sign. The Tankan was a bit mixed and too close to expectations to give a clear enough signal to the FX market.

There was also some attention for the imposed sanctions by the US Commerce department on Chinese imports of glossy paper. This brought the issue of protectionism on the screens, but the USD didn??™t seem to be suffering significantly for the moment??¦ unless protectionism and retaliation would become the talk of the town.

Today, the US ISM manufacturing could also be of influence for USD/JPY trading. The Asean+3 meeting could be of significance, the more as the conference discusses hot money inflows and burgeoning reserves. Any diversification theme stories could make the USD nervous.

The EUR/GBP pair was almost stable on Friday, as upticks above 0.68 were blocked off and the pair returned to just below this mark. This morning some more sterling strength is coming through, albeit still limited with the pair down to the 0.6780 zone at the moment of writing.

The Iran/hostage crisis is still not near an end apparently, but the impact on sterling sentiment still seems to be contained. If no escalation takes place, the market could return to the EMU/UK data today. That would mean that the EMU PMI and UK CIPS surveys on manufacturing could be driving forces. We expect a near stabilization at high levels in both surveys, so only an unexpected deviation could give some impact.

Nevertheless, we hold on to the view that the FX market has been too negative on the UK economy and the sterling. The UK eco data over the two past weeks have been mostly on the stronger side of expectations and we feel all the attention for the Iran crisis has diverted attention too much from this and some payback is needed. Moreover there could erupt some more speculation on a BoE rate hike this week, as the so-called ???shadow MPC??™ has voted 8-1 for a rate hike.