NEWS / Foreign Exchange

Heading for the test?

• US Treasuries rally stalls
• Underlying sentiment still bearish on European bond market
• Heading for the test?
• China storm calms down rather soon

The EUR/USD pair dipped slightly in the morning, reaching the 1.3560 area. Then the same pattern emerged as it did all week, namely euro being bought on dips. This brought the EUR/USD couple back up to the 1.36 zone. There it stabilised.

As euro zone yields rose again yesterday, while the US yields were virtually unchanged, this adds to the attractiveness of the single currency. The Philly Fed survey yesterday evening showed a stabilization at 0.2, which was below the expectations for the index to come out at 2.0. The leading indicators also were nothing spectacular (+0.1% M/M); these data are of no help to the US currency.

This morning, Asia reacted with a stronger opening of the euro to new highs at the 1.3620 zone. It is obvious that the same sentiment seems to prevail: the market is eager to find out the strength of the resistance of the record highs at the 1.3660-70 zone. Whether we can get such a test is another thing and a break even may be more difficult. We cannot imagine that it will be given up without a fight, at the very least.

There is also no news to guide a breakthrough at this stage. At the end of a good week for the euro, w e would not be surprised to see some profit taking, although it should again be rather mild and could come after a test of the highs first!

In the longer term, a solid euro view is maintained; nobody is scared of a strong euro. The view behind this is that there is some decoupling between the US and EMU eco cycle and the euro zone can digest the currency strength. Whether this view, dominating FX thinking currently, will prove to be true remains to be seen. It is the guiding theory for now, so in the mean time a buy-euro-on-dips sentiment should be maintained.

A very light calendar today, with only caution for US Treasury Secretary Paulson and Fed speakers such as Fisher and Mishkin.

USD/JPY made a very solid rebound yesterday. We cannot see this as a dollar positive reaction as there is little proof of this in other crosses. The US data also could not have been a help to the US currency as the leading indicators and the Philly Fed stressed the problems the US economy is facing, underscoring the growth figure.

The yen is the key factor here we feel. As outlined yesterday, we have great difficulty believing in a sustained yen comeback. There is simply no momentum from eco data or from the BoJ, while at the same time the risk aversion in Asian stocks ebbed. This week we also heard some speculation on a rate hike in Japan in Spring, but these rumours lack fundamentals.

Much to the contrary, the BoJ seems more likely to downgrade its inflation outlook in its Outlook for Economic Activity and Prices, to be released 27 Apr. Therefore we fear that this is another signal that nothing has to be expected from them. The Japanese are not keen to hike, while at the same time the US is (maybe) cutting rates, so this very gradual Japanese tightening campaign (two hikes in almost a year) may hit the pause button for now.

This sort of sentiment has to translate in a distrust of bouts of yen strength. We feel this pair is captured in a range trading environment (116-122?), as also the USD is in no place to go for a sharp rise, as long as the US data proof otherwise.

The EUR/GBP pair moved up from the 0.6780 area in the morning to the 0.6790 zone in the evening. This was built out this morning, with the pair reaching the 0.68 mark at the moment of writing.

We have some issues with the sterling. Its performance is disappointing. More could have been expected, but the sterling did not deliver we feel. The market has gone toward factoring in a rate hike in May and speculation of more after that. Still, the sterling revival didn??™t last long, as the pair stands again at the 0.68 zone.

It is obvious that the fight against the ???hot??™ euro is a difficult battle to say the least. As long as the single currency has got this kind of momentum, the timing may be wrong to go for a sterling comeback.

We turn more neutral on this pair. We first want some signals that things are cooling down in the EMU/euro momentum, at the same time keeping one eye on the EUR/USD test at the 1.3660 zone, should it occur, as it should be guiding for euro sentiment on a broader scale.