NEWS / Foreign Exchange

Sniffing at 1.36

• US Treasuries extending rebound
• European bonds extend correction higher
• Sniffing at 1.36
• Watch out for China

The EUR/USD pair yesterday tried to capture the psychological 1.36 mark. At a first attempt, the pair managed to only brief tick above this mark, as almost immediately some profit talking kicked in. A lot of players saw this zone, so close to the all time highs since the introduction of the euro, as attractive levels to cash in. The pair quickly fell back to the 1.3560 zone. The slide ended there though and gradually the buy-euro-on-dip sentiment did its job, so that by the evening the pair stood once more above the 1.36 mark.

This morning, this battle is still ongoing. The 1.36 line is clearly scaring some or at least giving some vertigo. That is only logical after all so close to the 1.3660-70 zone highs??¦

We recently also toned the euro bullishness down at these levels, preferring not to add to any euro exposure for now. As the 1.3660 record highs have come within reach, some cautiousness may be called for. A break of the resistance at that area should be difficult and could bring about a more outspoken ST corrective move lower in the EUR/USD pair. However an upside bias is maintained for the longer term.

The strong euro versus the dollar doesn??™t seem to scare off EMU policy makers. The view behind this is that there is some decoupling between the US and EMU eco cycle and the euro zone would digest the currency strength without too much loss of growth, while the US slowdown is still seen as contained. Whether this underlying view, explaining current FX thinking, will prove to be true will be a longer term item. But as long as this theory flies, there is no impetus for a longer term reversal in EUR/USD, so a buy-euro-on-dips sentiment should be maintained.

A rather light calendar today with the ECB monthly bulletin, German PPI and in the US initial claims and Philly Fed. These are normally not major market movers.

USD/JPY yesterday continued to dip slightly, as the pair retreated from the 118.60 zone in the morning to the 118 area day lows. It ended the day the 118.40 area. The US data yesterday showed some concerns over the housing market, but that didn??™t appear to be a driver.

The yen rebounded somewhat further this morning, on some more profit taking on yen short positions against a host of currencies. The Japanese tertiary industry index proved of some help also for that yen recovery, as the index rose by 1.0% M/M, whereas a small decline of 0.4% M/M had been expected. There apparently still is this speculation that the Bank of Japan may hike further in the spring. Fukui??™s comments this morning didn??™t offer anything new to deduce this.

USD/JPY now fell below the recent low at the 118.20 zone, demonstrating some more outspoken downward pressure. This shows that the uptrend in place since early March is now broken off. Still, whether this signals that the yen is strong enough to go for a true test lower at the 116 zone is another matter all together and seems too optimistic at this stage. We don??™t see any rate hike support from the BOJ and this speculation should ebb.

The EUR/GBP pair yesterday turned back up from the 0.6760 zone to the 0.6775 area. This morning, this uptick continued with the pair reaching the 0.6785 zone.

The UK data yesterday couldn??™t drive the sterling to new strength. The move of GBP/USD above 2.01, to 20+year highs, was driven more by USD softness at that time and couldn??™t be held on, although the pair still stands at the 2$ level.

The BoE Minutes of the latest meeting showed a 7-2 result, with the two dissenters favouring a rate hike. Ultra dove Blanchflower returned to an unchanged stance (from a vote for a cut). Since this latest meeting, the CPI has given a clear sign, so it is obvious that the moderates within the MPC will now join the hawks in voting for a rate hike at the next meeting. The release of the Minutes seems to have been used by some in the market as a ???sell-on-the-news??™ moment as the rate hike in May is a done thing and no new ammunition was handed by it.

We feel it is too soon to already see the end of the sterling revival. For now, the market is still going on strongly about the single currency, and this is putting a floor under EUR/GBP, but this cannot continue unabated, so some correction action will come.