NEWS / Foreign Exchange

Failed the test?

• US Treasuries pushed lower by mix of data and strong stocks
• ECB??™s Mersch suggests rates may go above 4%
• Failed the test?
• Data and Central bankers in the focus

The EUR/USD pair yesterday went for a test of the record highs,but the data couldn??™t force a break. The euro managed to get to just a few pipsoff the record highs at the 1.3670 zone.

The first release of theday of interest was the German IFO business confidence. Thisagain showed strength, confirming earlier reports such as the ZEW and Belgian confidence.The IFO index came out at 108.6 (from 107.7) and shows all is well with theeuro zone economic momentum going forward. This is reassuring and indicated thedecoupling theory between US and EMU can continue to be used. This is a strongunderlying factor for euro sentiment and permitted EUR/USD to slightly tick up towardsthe 1.3640-50 zone. Then the USdata were watched. The US durable goods orders brought some good news for the US atfirst glance. Orders rose a larger than expected 3.4% M/M (following an upwardrevision of the prior month too). The shipments of non-defence capital goods(less aircraft), used as an indicator for business investment, rose only 0.7%M/M, so all was not good news. That can even easier be said about the new home sales. These showed an annual rate of 858.000 units,below the estimate of 890.000 units. This shortfall had consequences especiallyfor EUR/USD, as upon this weaker figure EUR/USD went for a test of the record highs.EUR/USD came almostat the 1.3670 zone, but then some caution kicked in and no break was made. The figures probably weren??™t judgedimportant enough, or the deviation not large enough, to justify such a breakout. Next week??™s ISM and payrolls also start to loom in the distance??¦

Still, the pullback in EUR/USD wasn??™t large and shows the conviction andthe bias of the market in our view. The disappointment apparently wasn??™t largeas in the aftermath of the failed test the EUR/USD pair only returned to the1.3640 zone, ending the day almost unchanged.

Recent price action inEUR/USD has been illustrative of buying on dips into the euro. The downticks inthis EUR/USD pair never have last long over the past weeks. The up-move sinceearly March from the 1.31 zone to the 1.36 area has even been impressive andwithout much counter movements. The pressure remains to the upside.

USD/JPY ticked up slightly after the US durablegoods orders to the 118.80 zone, but was whistled back because of the weakerthan expected new home sales in the States to the 118.50 zone. But the yen once more couldn??™t hold on to any gains (already seen the previous day onall the poor USdata) and USD/JPY managed to climb back up to the 118.70 zone.

There was also the Fed??™s Beige Book yesterday evening. It saw modest growth and notedgenerally stable prices. The report however did not have any impact. This evening, some Fed speakers will be watched, withFischer and Yellen speaking on the economy.

Tomorrow morning will bethe main checkpoint for the yen outlook short-term. The BoJ convenes and publishes it Outlook Report. A downgrade of inflation could come about and thiswould set the tone for a softer yen. The market is concerned with this and thismaybe the reason behind the weak performance of the yen this week. Even so adowngrade of inflation outlook would still hurt the yen.

The EUR/GBP pair yesterday etched out a (tight) sideways path at the0.6810 zone. Thesterling recently was unable togain on all the good UKnews, but the euro hasn??™t had that problem. The IFO yesterday underscored thegood outlook for the EMU economy and supported the single currency on allfronts. Also yesterday, the UK GDP came out better than expected (0.7% Q/Q),but once more the sterling wasn??™t able to gain.

Today, BoE??™s Tucker speaks and the French businessconfidence is released. Looking ahead for the EUR/GBP pair, the risk isdefinitely out there for further hikes in the euro zone. Several ECB membershave spoken out hawkishly, making a case to see more rate hikes. In thissentiment, we fear the sterling cannot fight back too much against the hypedeuro??¦as long as the hype lasts of course. It is however not a done thing eitherthat the BoE pauses after its May rate hike either??¦

In other FX markets,overnight all attention went to New Zealand. Over there the RBNZ hiked rates to 7.75%(!), but tried to calm down the kiwi dollar by saying that the currency was toostrong. The Bank also did not give a forward-looking policy statement, whichmay indicate the end of the tightening cycle. The NZD at first reacted volatile,but in the end some strengthening was noted.