NEWS / Foreign Exchange

G7 sticks to script

The EUR/USD pair tried to dip on Friday on some profit taking as the pair had set new records the prior day, but this didn??™t go far and towards the end of the day the pair had ticked up towards the 1.43 zone again.

The first move this morning was a spike higher and a fresh record high in EUR/USD at the 1.4340 zone. This was a clear post-G7 knee jerk reaction. It is obvious that the G7 didn??™t have anything to say on the USD softness, so there is no obstacle erected by the G7 against a higher EUR/USD. Despite this new high, there was no followthrough action to the upside and things cooled down quite fast. The G7 was recognized for what it was to FX markets: a non-event.

What we need to remember is that the resistance from within the EMU is not strong, nor unified, against a strengthening euro and that is what the market will also remember. There is still upside left in this pair from that angle. ECB??™s Bini-Smaghi this morning reiterated the EMU view, stressing the benefits of a strong euro.

Also from the USD angle we feel there is still more downside. The Fed members have sometimes highlighted potential problems with a softening dollar (inflation) but haven??™t been worried about it. Also, the Fed may decide to cut rates at their upcoming meeting, which will give some more dollar softness short-term.

We thus feel the pair has some more upside left in a buy-euro-on-dip scenario.  

Today, the calendar is virtually empty, so it looks like a calm day ahead.

The yen continues on its winning streak. The USD/JPY pair dipped from the 115.20 zone to the 114 area late on Friday. This morning, the pair even briefly dipped to the 113.50 zone, as the G7 is not doing anything to stop the current dollar decline. Also all the yuan bashing at the G7 (???we stress the need to allow an accelerated (yuan) appreciation??™) is interpreted as a desire to see stronger Asian currencies against the USD. This is also of some marginal help to the yen we feel.

For the rest, the G7 stuck to the usual mantras ???exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth.??™

Regarding the yen, stock markets need to be monitored of course. Friday was the anniversary of the 1987 stock market crash, which became known as ???Black Monday??™. Will today be a new black Monday. We will see. The S&P stands at interesting levels with a key support at 1496. The yen will be following developments on this front as an input for trading. Potential softness in equities will be of help to the yen.??¦

Looking at the longer term, 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.

EUR/GBP dipped slightly on Friday from the 0.6990 zone to the 0.6965 area intraday. The UK Q3 GDP number on Friday again showed underlying solid fundamentals of the UK economy, but was bluntly ignored.

We feel the UK data have been too solid (recall last week??™s retails sales for instance) to justify a bearish sterling view. The EUR/GBP pair should become capped in the 0.70 zone. That is why we feel more for a buy-sterling-on-dip approach at this stage.

The pair is still moving in a sideways tunnel for now between the 0.7020 zone and the 0.6894 zone to the downside.

Today is a calm day. The most interesting releases this week come from the EMU with the PMI??™s on Wednesday and the German IFO on Thursday.