NEWS / Foreign Exchange

Euro Surges in Asia, Bank of Japan Forecast Unchanged

Talking Points

???   Australian Dollar: Jobs climb to record in March but business confidence falters
???   Japanese Yen: BOJ stays pat forecast unchanged  
???   Euro:  French IP rebounds strongly
???   US Dollar: IBD Economic optimism on tap

Euro Surges in Asia, BOJ Forecast Unchanged

After a very sedate Easter Monday session the currency market saw a wild night of trade in Asia with the EURUSD surging nearly 100 points off the lows set in New York.  The greenback enjoying only a brief bounce from  the stronger than expected employment results, came under selling pressure once again on fears that the sub-prime mortgage problem was beginning to spread throughout other credit sectors of the US economy.  The dollar sell-off was precipitated by 15% plunge in shares of American Home Mortgage after the REIT announced that its earnings would be heavily impacted by the losses in Alt-A mortgages which are a grade higher than sub-prime but are nevertheless beginning to experience the same type of problems as the lower end of the market.

The question of just how much impact will the slowdown in housing have on the rest of the US economy remains open-ended.  However, with US earnings season about to unfold, currency traders weren??™t willing to grant the greenback the benefit of the doubt and continued to sell the unit in early London trade. The pair was also aided by a strong rebound in French Industrial Production which showed that the EZ manufacturing is unaffected by the high  value of its currency and as its impressive expansion continues.  The strong results in the French Industrial sector are only likely to bolster market expectations of an ECB rate hike in May. However, as our colleague Kathy Lien pointed out yesterday, Mr. Trichet??™s language at this Thursday??™s press conference will be key to gauging the intent of the European monetary policymakers.  If the ECB chief does not use the words ???extreme vigilance??? in his assessment of future policy, traders could quickly sell the euro on the assumption that the hike may be delayed until June. For now the EURUSD continues to be contained in the 1.3300-1.3450 range as traders weigh the likelihood of a May ECB rate hike against any further evidence of a US economic slowdown.      

Meanwhile in Japan, no rate hike was forthcoming as the BOJ kept overnight call rates at 0.50%  The Japanese central bank did not change its forecast, suggesting that, "Japan's economy is expanding moderately, ??? while maintaining that inflation will be flat at 0% on a year over year basis.  With no immediate threat on the price front, the BOJ monetary authorities are likely to remain neutral through at least the first half of  2007. Thus, after a brief sojourn below 119.00  USDJPY was quickly bought as carry demand for the pair emerged once again.  If US data is able to show any further upside surprises,  demonstrating that the sub-prime fears are highly overblown, then USDJPY could challenge its yearly highs in the next few weeks as yield hunters return to the pair in droves.