NEWS / Foreign Exchange

The trouble with euro

• US Treasuries eke out some moderate gains
• European bonds correct higher on short covering
• The trouble with euro
• The glass is half full, not half empty

The story of yesterday can be short (and sweet?): nothing much happened in the EUR/USD pair. If anything some very timid profit taking was noted on the recent upmove in the single currency, but with a move from day highs at 1.3560 to end-of-the-day rates at 1.3530 zone, one mustn??™t exaggerate this, especially taking into account the upmove seen over the past weeks. Indeed, the pair still stood at the 1.31 zone early March and look at where we are now??¦

Some of this move was to be blamed on concerns on the US economic outlook; some of it was due to euro strength. Now we have come close to key resistances in this EUR/USD pair, which stand at the 1.36 zone record highs. So it is only logical to see some hesitation at this stage. Something will be needed if one wants to see a break of this area. This may accordingly be difficult at first attempt(s).

The data yesterday didn??™t provide any impetus on either side for the EUR/USD pair apparently. The US retail sales looked good, but this was to a large extent due to an upward price effect at gasoline stations, so the picture is clouded. Meanwhile, the NY Empire survey showed that the manufacturing sector still displays weakened conditions, as the index failed to rebound.

Today, things could heat up with the German ZEW survey and even more with the eagerly awaited US CPI number. ECB??™s Trichet will also be followed as he speaks about ???the euro and the dollar: pillars in global finance??™. Yesterday evening, ECB??™s Noyer reconfirmed the euro positive stance, as he said that the euro is becoming ???extremely attractive??? as reserve currency.

USD/JPY ticked slightly higher during yesterday??™s trading, up from overnight levels at 119.40 to day highs at the 119.60 area.

As the G7 came and went and nothing changed once more, it is clear that there are no road blocks of great significance between here and the 121-122 zone. The G7, by not saying anything, de facto gave the go-ahead for a continuation of the current conditions on the FX markets: carry trades are allowed to continue unabated.

The only thing that has changed between the beginning of the year, when the USD/JPY rate stood at 120+ levels and now is the dollar sentiment, which has been toned down a notch. Still, as long as the yen cannot take the command, there will be no sustained decline in USD/JPY. Instead, we have seen a sharp short-lived fall end February-early March in the pair from the 121 zone to the 115 area, and after that a slow but steady rise back up again to reach the 119??™s by now. This seems to be the pattern to keep following: steady and slow rise in USD/JPY, also witness in other yen pairs??¦

Yesterday, the TIC data showed the purchase of US long-term securities slowing in February to USD 58.1B from 98.8B in January, as investors bought fewer US stocks and agency bonds. It had no impact on FX markets; those days seem to be long forgotten??¦

The EUR/GBP pair too made a step back down yesterday, ticking down from the 0.6820 zone to the 0.68 area, as UK data showed inflationary pressures.

Indeed, both headline and core output PPI rose a stronger than expected 2.7% Y/Y in March (compared to 2.3% Y/Y in Feb) in the UK. This will raise eyebrows at the BoE for sure??¦ At the same time, the euro flash CPI was confirmed at 1.9% Y/Y, still below the 2.00% threshold. With the German VAT rise behind us, one can wonder where the inflationary pressures are in the EMU.

A very euro positive stance has overtaken the FX markets lately, but having come to some high levels in EUR/GBP, but also in EUR/USD (see above), the question now becomes: ???what??™s next???™ What can keep this good euro momentum going? Frankly, in the forex markets, that is often the signal to become somewhat more cautious in the short-term. All the good news was always soaked up by the euro, but other sterling positive news had gone too long unnoticed: at a certain moment comes payback time and that day is approaching, with the Bank of England on track for an unavoidable rate hike, while many eyes may still have to open that there is no urgency from the ECB??™s viewpoint for fast rate hikes after a move to 4.00%, which has been already very well anticipated by the markets??¦