NEWS / Foreign Exchange

EUR slips

• US Treasuries flat ahead of FOMC meeting
• European finance ministers call on Sarkozy to respect ECB??™s independence
• EUR slips
• A (small) correction on FX and equity markets

Global overview: A (small) correction on FX and equity markets

Yesterday, markets showedsomewhat of a different picture than we got used to. Indeed, the ongoing risein the stock markets is apparently no a law of nature. Nevertheless, thecontext didn??™t really change and the trading themes (M&A) remained the same.

The trigger for suchcorrections is often difficult to find, but yesterday for the first time we sawinvestors taking profit on some corporates reporting better than expectedresults. The uncertainty going into the central bankers??™ meetings today andtomorrow might have been part of the explanation. However, there is so sign yetthat the moves are more than a short-term technical correction. The priceaction yesterday evening in the US for example proved that the buy-on-dipstrading mode is still very much in place, as US stocks in the last part of thesession recouped most of the initial losses. Also this morning inAsia/Australia, M&A rumours and speculation again do their job and help(some) stock market indices higher again.

In other markets, therewere also tentative signs of a (temporary?) more defensive investor attitude. Themost striking one was that that even the yen, still the favoured fundingcurrency for almost all riskier asset classes, regained some ground. The dollarwas slightly lower against the yen, but stronger against the euro, suggestingthat the correction/re-positioning mostly went through EUR/JPY. Bonds weremarginally higher on this stock market correction (there were no eco data), butUS bonds were already little changed after stocks recovered.

Today and tomorrow, themarket focus will shift to the central bankers. In this respect, the marketreaction to the signals from the central bankers could give us clues about whethersentiment might be changing in some markets. For example, who will investors reactin case the Fed would turn softer on the economy (and thus potentially also oninterest rates).  

Currencies: EUR slips

The single currencyyesterday had a bit of an off-day across the board. That was obvious in or main currency pairs:EUR/USD, EUR/GBP and EUR/JPY. A number of reasons could be given for this, butit is impossible to pinpoint each individual contribution to a sense of someeuro softness for the moment.

Of course, there were theslightly weaker German industrial production data in the morning, but thesedidn??™t have a direct impact.

Most likely the eurois feeling a bit tired of all the fighting for higher ground, and having been unable to keep the record highs,some sense of profit taking kicked in. After all, the market is also lookingahead and seeing quite some potentially important events: the Fed, the ECB andthe BoE convene this week.

It all starts withthe USFederal Reserve this evening. Itwill keep rates on hold but all eyes are on the statement afterwards; How willthe Fed react to al the recent mixed data. We don??™t expect too much of achange.

If there is any risk forthe Fed, it is a softer stance on growth for instance; that would be a dollarnegative. We feel the market focuses much more on the inflation issue rightnow. Still, it would mean the EUR/USD dip shouldn??™t go much further.

The USD/JPY pairslipped back below 120 over the past 24 hours. As mentioned above also EUR/JPYslipped somewhat.

Some analysts point tothe soft opening of the stock markets. Indeed, this may have played, buttowards the end of the USsession, losses were recouped and the USD then made a comeback versus the yen.

This morning the yenagain tried to strengthen a bit. Some traders seem a bit scared of the Fed. As outlined above there is a risk of course that theFed is also scared by the recent mixed data and adopts a more cautious tone. Thisis not the main scenario though and the correction lower in USD/JPY shouldn??™tgo much further on this theme, if this pans out as expected that is.

What also can be a factoris the debate tonight in the Joint Congress Committee overin the US,which will discuss FX issues. The main question it will try and answer iswhether China and Japan try and undervalue their currency byinterventions, what impact this has on the US economy and what action needs tobe undertaken.

Until now there has beenno consensus on calling Chinaor Japan FX manipulators and also today that seems a difficult option, but thediscussion is alive and this can already bring some resistance to any dollarstrength versus Asian currencies on the day. So we don??™t see a reason to push USD backabove 120 on a day like this, unless these two hurdles (Fed and Committee) arecleared with conviction.

From the yen side of thespectre, we still see a lack of impetus. This morning??™s leading indicator remains below the 50 levels, coming out at 40.0 in a preliminaryreading for March.

EUR/GBP dipped slightly lower yesterday to the 0.68zone, in line with the general softer euro sentiment. We don??™t look for toomany reasons for this or draw too many hasty conclusions form this off-day.

Thismorning, the UKBRC retail sales weakened quite substantially in the month of April.While one shouldn??™t dramatize, this was below consensus and some analysts fearthis may point to a trend reversal signal. Confirmation will be needed. Still,it feeds the doubts we already had that the sterling missed its window ofopportunity to strengthen when all was going so well over the past months. Nowthis week, the Bank of England will with almost certitude hike rates by 25basis points to 5.5%, but what comes after that is more in doubt in our view??¦ Themarket could be too eager for more and may have to tone down that bias for arate hike more later in the year. Much will depend on the statement the BoEreleases tomorrow following its rate hike. The ECB will, of course, also befollowed quite attentively tomorrow.

Concluding, Thursday??™sevents, the BoE and ECB, will likely hold the key for this pair to unlock fromthis tight sideways trading, so this pattern should continue today. So afteryesterday??™s decline in EUR, a better day today?