NEWS / Foreign Exchange

Yen in trouble??¦again

• US Treasuries down for second session
• European 2-year bond yields at new cycle high
• Yen in trouble??¦again
• Japanese data: an ???all clear??™ for carry traders

The euro failed toprofit from the clear action on the European yield curve, as the 2 year yieldsbroke above resistance atthe highs, indicating the hawkishness of the ECB and the belief that more ratehikes will be needed as the EMU economy steams ahead. Maybe the euro didn??™tdare follow the example and didn??™t even really react to this event. We feel themarket players in FX may be waiting for the US ISM and payrolls data of nextweek to make a longer-term choice pro or against the dollar??¦

That would mean that alsofor today the action could be somewhat subdued unless something can beinstigated by the US GDP data. It is the first view of the Q1 numbers andthis could give some influence for the FX market on the day. Whether it couldbe enough for a new test of the highs, is however more difficult we feel. Theinflation data (PCE) could be pointing to upside risks and neutralize a poorGDP effect.

Any break on a huge disappointmentwould probably be temporary ahead of next week??™s data. Still, we maintain,because of the underlying fundamentals, a buy-euroon- dip feeling.

USD/JPY yesterday ticked up from the 118.70 zone tothe mid 119??™s. This happened not so much on the release of data, but more onthe anticipation of data.

Indeed, this morning, theJapanese data were in the focus. The industrial production slowed by 0.6% Y/Yin March, the retail sales declined by 0.7% Y/Y and the household spendinggrowth slowed to 0.1% Y/Y. All show weakness in the economy. Especially thelatter was earmarked as the driver for growth going forward but is stalling painfully.To make matters worse the CPI shows a chance of Japan slipping back into a periodof deflation as nationwide core CPI slipped 0.3% Y/Y in March and the leading Tokyo core CPI came inflat. Tokyo CPI excluding food and energy even slipped 0.2% Y/Y. We alwaysindicated a rate hike in Japanis not likely until after the Summer (and the elections), but now the case becomes even more difficult,if this is confirmed of course, to make a good case for a rate hike, even afterthe summer??¦ These data gave a short term highfor USD/JPY this morning and new record highs (although only minor) for EUR/JPYat the 162.80 zone.

The BoJ published its Outlook Report but kept its outlook for inflation and growthunaltered, saving the day for the yen. At the time of writing, BOJ governor Fukui still had to give a press conference.

The EUR/GBP pair again ticked higher yesterday, developing the currentmood, up from the 0.6810 zone to the 0.6830 area. In doing so, the pair againcomes close to important resistances at the top of the recent ranges. At 0.6829 stands a recent high (undertest, break looks done??¦) and at 0.6867 stands the year high??¦

The French businessconfidence in the morning confirmed the good state of affairs in the zone. Suchsentiment should keep the euro underpinned until further notice. BoE??™s Tuckeralso was of no help to sterling as he indicated his belief that inflation wouldfall back sharply.

We stick to the view thatthe sterling has wasted its opportunities and that has probably disappointed alot of market players. With the euro momentum on the other hand still solidenough, and the market also looking for higher yields at the short end of theEMU yield curve, this pair should find some decent support early on. Therefore a buy-euro-on-dip strategyseems to fit well.

Today, attention shouldgo to German CPI and Italian business confidence.