NEWS / Foreign Exchange

Greed is good for you, fear is good for the yen

The EUR/USD pair went for a test of the record highs at the1.4280 zone yesterday. The fall-out from the Wednesday??™s soft housing data and the Beige Book??™s admission that the growth was slowing gave some continued dollar softness. Eventually this gave a test and a break of the highs. The pair set new record highs at the 1.4310 zone.

The market also saw that there were little obstacles in the way of a test. Indeed, the upcoming G7 will focus on the Chinese yuan and its need to appreciate, not on the strong euro.

The EMU policy makers (except the French) do not seem overly concerned with EUR/USD for the moment, as diverse signals show the impact is still muted. Ecofin also decided not to make a big issue out of this (instead also aiming for the Chinese yuan as enemy nr.1). Yesterday, the European business leaders stepped up their warnings about the impact of the soaring euro, but this comes too late to have an impact at the G7.

The IMF also calls for a depreciation of the ???overvalued??™ dollar. Also the Fed is not ready to come to the rescue of the dollar, as we feel a lot for a rate cut 30-31 October at the upcoming FOMC meeting. Such a scenario would be an additional dollar negative near term.

On the Fed views, we could get some clarification with speeches of Fed??™s Bernanke and Poole. Today, the data a calendar looks pretty empty.

The Indian stock market troubles seem to continue. The market attempted to digest the news of the stock market watchdog looking for curbs on foreign inflows, but hasn??™t really succeeded in doing so. Yesterday, the Sensex had to give its rebound back and this shows the growing risk aversion. Also in the US this sentiment was demonstrated by the poorer than expected results of Bank of America.

This morning also the Japanese stock market is sinking a bit. This is showing the growing risk aversion in Asia. Morgan Stanley??™s Asia director Roach summed it up nicely this week, saying that Asia shouldn??™t be too complacent on a US growth slowdown. Apparently his words sum up the emerging sentiment. Comments overnight from Fed??™s Pianalto and BoJ??™s Fukui highlighted the uncertainty central banks feel over the potential fall-out form the financial market turmoil on the economy. There is also continued talk about today being the 20th anniversary of the 1987 stock market crash??¦

This is ideal for the yen and we see the currency making headway across the board, even gaining against the strong euro at this stage. Of course the start of the G7 meeting can mean that a lot of players are toning down their over-extended yen short positions and this is causing a yen appreciation short-term. The G7 will target especially the Chinese yuan for more flexibility. Chinese delegation at the G7 will be low key due to the ongoing Chinese Communist Party Congress

For the FX markets, all this yuan bashing could also imply that the yen has more room to appreciate in this sentiment. We however feel the G7 will have not much to say on the yen, so this fear will abate soon.

The risk aversion theme seems to be the main driver even at this stage we feel, so we would monitor that closely. USD/JPY is in a broad sideways range between 117.95 and 111.60. There is still some significant downside in other words, without disrupting this sideways pattern.

UK retail sales on Thursday were stronger than expected, rising at an annual rate of 6.3% in September. This is some additional good news for the sterling, but unfortunately it didn??™t manage to gain against a strong euro on the day. EUR/GBP indeed ticked up from the 0.6970 area to the 0.6990 zone.

The pair is still moving in a sideways tunnel for now between the 0.7020 zone and the 0.6894 zone to the downside. We would continue to play these ranges for now. We feel that should the pair go above 0.70, this would be an interesting level to buy back the oversold sterling.

Today, the UK Q3 GDP will get a lot of attention to see how growth is holding up.