NEWS / Foreign Exchange

EUR/USD to new records

The EUR/USD pair went for extra upside last Friday, testing the record highs set on Monday morning at the 1.4349 zone and taking these out, thus reaching the 1.44 mark for the first time in the history of the single currency.

Last Friday, the Michigan consumer sentiment showed a further drop from 82 early October to 80.9 in late October.

This morning again new records were set as the pair reached the 1.4430 zone in Asian trading. We didn??™t see any fresh news to guide this, so this is more a continuation of the prevailing dollar negative sentiment.

The recent movements on the FX market clearly demonstrate the softness of the US dollar. We stick to the longer standing bias to sell the greenback into strength. We don??™t sell outright at this stage as the pair has gone up fast and is now in hugely overbought conditions.

We fear more upside could be seen in the run-up to the Fed meeting as a rate cut should occur. The data later this week will be guiding for direction further out with the US ISM and the payrolls.

We don??™t yet monitor an outright feeling of panic. Once we see that, it would be a sign that exaggeration had kicked in and there may be room for a dollar comeback.

We don??™t actually feel that for now. Last Monday??™s dollar comeback didn??™t last long and now we even stand higher with this pair. That will have hurt the feeling (and wallets) of dollar bulls. We feel a more tangible trigger will be needed to shift sentiment.

Today, such a trigger seems not readily available, as the calendar is virtually empty. As mentioned above the data at the end of the week could be all important fro the USD.

USD/JPY is rather stable at the 114.20 zone in these turbulent times. The USD is soft overall, but no losses are made versus the JPY. This currency can no longer profit from any safe haven sentiment as stock markets seem to be holding up. Indeed, stock markets are doing well in Asia this morning and also in Japan. The equities look forward to a Fed rate cut in the US as supportive for growth.

Carry trades are doing well enough, but the idea now seems to be more axed on commodity currencies, as the Aussie is seen performing strong on account of gold and the Canadian dollar is seen performing well on account of oil prices (both reached 33 year highs against the USD this morning).

The Chinese have been pretty vocal not wanting a after appreciation of the yuan, but this morning the yuan made another new high since the July 2005 revaluation, after having set some good gains already last week. Something appears to be moving over there. This may help other Asian currencies feel more at ease with dollar softness too, a last week a lot of central banks felt the urge to intervene to stop their currencies from further gains against the USD. If the yuan is permitted to gain, this will make it politically more acceptable to let other regional currencies gain against the USD, keeping the relation between regional currency and the Chinese yuan more stable.

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.

As the euro is strong against the USD, it is almost inevitable it makes some smaller gains against other currencies, such as CHF or even GBP. EUR/GBP reached the 0.70 zone.

The financial sector doubts (originated in the US last week with the Merrill Lynch story) are hurting the sterling too for the moment. The Financial Stability Report of the BoE highlighted that there are risks to the housing sector and commercial real estate. This is not comforting and makes investors septic, preferring to wait before buying sterling. That is propping the EUR/GBP pair up above 0.70. We feel this is too high and are inclined to buy back sterling at these levels; but we prefer to wait a while though as we feel a test of the 0.7028 zone will come about over the coming days and want to see how this pans out before jumping on.