NEWS / Foreign Exchange

EUR/USD re-tests the record highs

The EUR/USD pair rose from the 1.4260 zone to the 1.4330 zone. It almost came to a test of the recent record highs, set Monday morning at the 1.4349 zone, but in the end nothing happened??¦but this was only postponement apparently as at the moment of writing EUR/USD set new record highs.

Yesterday, the US durable goods orders fell 1.7% M/M (and -6.6% Y/Y) in September, following a downwardly revised 5.3% M/M in August (was -4.9% M/M). Need we qualify this as weak? The dollar lost ground quite logically to the 1.4330 zone on this.

The new home sales on the other hand brought some relief, as sales rose 4.8% in the headline, but we have to admit tat this was on account of a downward revision of the prior month (see news)??¦A true test of EUR/USD record highs didn??™t occur.

The recent movements on the FX market seem to demonstrate a softness of the dollar and an attitude to sell the greenback into strength. That has brought the pair back up to the record highs and we fear more upside could be seen in the run-up to the Fed meeting as a rate cut should occur.

We don??™t yet see a feeling of panic on the dollar. This is a sign of a market still at ease with dollar softness going forward. Panic would cause an exhaustion move and this could be a trigger for a ST come-back., much like the one seen on Monday, when the G7 caused a brief up-tick to record highs.

The fact that we came back so easily to these highs later in the week suggests ongoing dollar selling, which keeps pounding away, hurting the dollar value eventually. The poor eco data this week out of the US only mirror this sentiment. Any further fallout from the likes of Merrill Lynch could also prove too much for the US currency.

Today, only the final Michigan consumer confidence is expected to be confirmed at 82.0.

USD/JPY had a stable day yesterday, revolving around the 114.20 level.

Oil rose to fresh records above 91$ per barrel on NY (89$ on London Brent). In the past, oil price rises sometimes had an adverse impact on the yen, as Japan is a huge net importer. This, however, for now doesn??™t seem to be an item.

Japan industrial output fell 1.4% M/M in September. Nevertheless METI kept its assessment unchanged that industrial output is on a moderate rising trend. Japan core CPI nationwide fell 0.1% Y/Y. Tokyo October core CPI was flat Y/Y and overall CPI was +0.1% Y/Y This held no surprises and should not intervene any rate hikes from the BoJ, should it choose to finally continue its normalization plan. It isalso noteworthy that the new cheaper phone fees will not be incorporated in CPI next month.

This morning, there has been speculation that HKMA will soon shift its band for the HKD peg from 7.75-7.85 down to 7.65-7.75, in response to the yuan appreciation. The HKD is testing the downward boundary and the Authority had to intervene to stop it from breaching. A lot of Asian currencies are strong against the USD and there is a lot of talk of interventions, such as in the Philippines, Taiwan, Malaysia, etc.

USD/JPY has been moving in a broad sideways range between 117.95 and 111.60. We would advise to play those ranges, with currently a bias to the downside.

EUR/GBP ticked slightly higher yesterday, despite the decline in the German IFO. This fell back slightly from 104.2 to 103.9 in October. Maybe the market was a bit relieved that it wasn??™t as bad as the PMI??™s earlier this week indicated. Also, the IFO indicated that the euro pain threshold had not been reached yet.

The renewed financial sector doubts (originated in the US this week) are hurting the sterling too for the moment. All of the above has brought EUR/GBP higher in the range. We still feel this is a bit overdone and would buy the sterling in case of upticks above 0.70, with a stop-loss above 0.7028 should we be wrong.

Some calming comments from NIESR don??™t seem to be able to help. The institute said that the impact of the financial crisis on the UK economy seems to be limited. It adds that it doesn??™t see BoE rate cuts until summer ??™08.