NEWS / Foreign Exchange

Yen anyone?

• US Treasuries hover sideways
• European bonds sold off after technical break lower
• Yen anyone?
• G7 meeting: everybody happy

Let??™s first return to last Friday for movements in the markets at that time. EUR/USD continued its upward vault, with the pair climbing form the 1.35 zone to the 1.3550 area by closing time.

The calendar was interesting with the US trade balance, the PPI and the Michigan consumer confidence. The PPI and trade data showed two faces. Headline PPI was higher but core PPI was under control. The trade balance showed a narrowing deficit, but it was the result of declining crude imports. The Michigan consumer confidence couldn??™t even keep up appearances, as sentiment dipped from 88.4 to 85.3. This wasn??™t the good news the dollar needed to take away some doubts. The slide continued.

Today, the calendar is heavy for a Monday, with the US retail sales, the Empire Fed survey and the TIC capital flow data. This could be a crucial day, as the 1.3666 record highs start to loom.

The euro positive attitude in the market has been obvious recently, so we continue with a buy-euro-on-dip strategy.

As mentioned above, the G7 statement was rather unchanged not attacking the recent (and even not so recent) yen weakness. Also carry trades were not addressed. This seems an open invitation for more of the same, so this morning, the logical market reaction at the open of Asian FX markets was more yen weakness. USD/JPY went up, but also EUR/JPY moving to the 162.50 zone is pretty hallucinating.

Things cooled down since this initial FX reaction, on some profit taking and rumoured exporter selling in Japan, but the underlying picture cannot be denied: The yen is in trouble; far off prospects for Japanese rate hikes are of no help.

Other countries also face such prospects, as the G7 acknowledges that the global economy has the strongest sustained expansion in some 30 years and is becoming more balanced. If this isn??™t an encouragement for the commodity and high yielding currencies, we don??™t know.

This is an open invitation for carry trades to continue unabated for now. A good example of heightened rate hike s speculation is the NZD, with the April 26 meeting highlighted as a potential chance for such a hike, underpinning kiwi dollar sentiment.

The EUR/GBP pair was sideways oriented on Friday at the 0.6810 zone for most of the day. This morning at the Asian open, the euro optimism (also expressed by ECB??™s Wellink over the weekend) provided a surge in EUR value, but this petered out very fast.

Overnight the RICS housing survey showed that prices rose at the fastest pace in almost 4 years, as they went up by 15% Y/Y! Recall that the previous month saw a rise of 12.2% Y/Y, still not bad. This won??™t be received with enthousiasm at the Bank of England and puts a further bias for a rate hike at the coming meeting. This is our bias and we see it as a help for the sterling in these difficult times.

The sterling is indeed overwhelmed by the euro performance, but we feel this is an opportunity as the market has become too euro positive and the outlook maybe too rosy for the EMU economy and rates. Indeed, EMU rates have shot up and dragged euro sentiment along. We still see a wide rate differential with the UK and the Bank of England seems to be keeping pace with the ECB for now; Therefore we feel there is reward in going sterling long at this stage. A stop-loss could be set though if the pair moves up and beyond the recent highs at the 0.6867 area.