NEWS / Foreign Exchange

EUR/USD nudges up

• Treasuries decline as Fed is (more) concerned on inflation
• European yields continue to move higher ahead of ECB meeting
• EUR/USD nudges up
• Not too bad, according to the IMF

EUR/USD yesterday was the calmest of all currency pairs, so to speak, as the trading action saw prices move between the 1.3410 and 1.3440 area. That is not volatility.

Truth be told, it was a quiet day overall though, with no market moving news or market shaking events. There was some heightened attention for the US FOMC Minutes of the last meeting. These gave some hawkish headlines (see US Treasuries part for details) but the dollar once more couldn??™t really profit.

This morning, EUR/USD took it another step higher though. In Asian trading once more the USD ran into trouble versus the euro. EUR/USD spiked from the 1.3430 zone to the 1.3460 area, effectively setting new cycle highs, in the run-up to the ECB meeting today...

In these circumstances, our dollar scepticism is maintained, so this is still translated in a sell-USD-into-strength attitude.

Today, there are some interesting data/events on the calendar. As mentioned, the highlight could be the ECB meeting, with rate decision at 13.45 CET (expected unchanged at 3.75%) and the press conference at 14.30 CET. At this conference, Trichet will give some comments and these will be discerned for clues on monetary policy going forward. Will he pre-announce a rate hike next time? Some players are clearly hoping such a hawkish stance. In our book, that chance seems slim for now, so we would see a wait-and-see attitude at this time, giving a close repeat of last months??™ meeting comments. That is why the impact on FX markets could be limited and even, seeing the present positioning of the market, quite euro long, a slight handicap going forward short-term for the single currency.

The US claims are the main data release in the US today and could help the dollar fight back slightly as a low reading could be expected due to the timing of Good Friday apparently.

So some caution in adding to euro longs on a day like this.

The yen from its side is the weakest of the weak. With a dollar under some negative pressure, the USD/JPY pair even succeeds nevertheless to rise. The yen is sold off across the board, as carry traders still see a great opportunity in going short yen.

We see the recent eco data as an underlying explanation, as it has sown doubts over the prospects of the Japanese economy (poor industrial production, core machinery orders). The Bank of Japan will have little opportunity to move to rate hikes. Now even some market players are beginning to doubt the scenario of a rate hike in Q3 ??™07, as a rate hike before the summer was already excluded because of the July elections in Japan, so as to avoid political interference in the multilateral sense.

This sort of price action only confirms our upside bias for the pair. This is kept in place as long as the break above 118.50 is kept in place.

The sentiment is also confirmed in comments by the IMF, which claimed there was no need for heavy-handed intervention to control yen carry trades. That seems an open invitation. The carry trade them is back in full force. EUR/JPY is also living proof as it hit new all time highs over the past 24 hours??¦the losses of the Swiss Franc this morning is another piece of evidence, if one needed anymore.

The strong euro attitude overall is also visible in EUR/GBP Yesterday morning, it still appeared as if the sterling could fight back, with the strong BRC retail trade data and the rumour of a tax exemption for British companies bringing home foreign profits.

But the sterling optimism couldn???t be maintained for a longer time. In the morning, the pair had dipped from the 0.6810 zone to the 0.6780 area, but during the rest of the day, the par slowly climbed up back to the 0.68 area. This morning, the pair even stands again at the 0.6810-20 zone??¦

We need to tone down our hopeful bulletins for the sterling as issued yesterday morning and return with both feet to the ground. We still feel the sterling is shortchanged though. This morning, once more, the data were strong with the RICS house survey showing a balance of +25.5 in March (up from +24.8). We keep the flame of hope alive for better times to arrive (for the sterling).