NEWS / Foreign Exchange

Risk aversion may help yen rebound

The dollar couldn??™t rebound as we had hoped last week. Much to the contrary new highs were set in EUR/USD!

The Fed decided to cut rarest as expected by 25 basis points. It didn??™t sound too dovish though with risk between inflation (upside) and growth (downside) labelled as ???balanced??™. Also governor Hoeing dissented in favour of unchanged rates. This indicates the Fed may not cut in December.

This was of little help to the dollar despite oversold conditions. EUR/USD reached the 1.45 zone, a new record high.

The pair subsequently was pulled back slightly, but this was nothing more than a small dip after all. The sell-dollar-into-strength attitude apparently prevails.

On Friday this was confirmed as the pair again set new highs just above 1.45. The US payrolls nevertheless brought some hope as job growth was double that expected, at +166.000 jobs. The dollar only briefly was helped by this release.

More rumours about losses at US banks are hurting the dollar. This was confirmed over the weekend with Citigroup, announcing a write-down of between 8 and 11 B $ of subprime mortgage related losses, additional to the 6.5 B $ written down last quarter.

If out of the EMU similar reports would come this week, the euro could become capped, so financial news could dominate short-term.

Today, there will also be some attention for the US ISM non-manufacturing release, but this normally isn??™t a big market mover.

USD/JPY had risen recently, but on Friday the dollar failed to sustain above 115, despite the stronger than expected US payrolls.

This seems to indicate that the dollar rebound over there has run its course, especially considering the broader weakness of the dollar.

Credit woes are again at the fore with the news of Citigroup (additional writedowns and resignation of CEO Prince). Asian stock markets are also having a more difficult time this morning. In this atmosphere there is clearly room for the yen to strengthen.

In a way, USD/JPY tested the 115.30 zone resistance last week, but failed to sustain above. This indicates there is technical downside available for this pair with the bottom of the recent range standing at the 111.60 zone??¦

EUR/GBP is moving about sideways around the 0.6940 zone for now.

Last week we pleaded for some downward correction in EUR/GBP, down from the 0.70 zone. This has materialized with the pair currently at the 0.6940 area. The pair is still in a broad sideways mode between the 0.7028 and the 0.6894 zone.

The resurging financial turmoil in the US may trigger some cautiousness in the UK as this has been where also financial fall-out has been registered recently. Just recall Northern Rock. So the sterling could be fragile to bad news on this front.

There hasn??™t been much movement on Friday or this morning on this news though, so this may be a sign the sterling is becoming somewhat more resilient. Wait and see.

The calendar is pretty empty today in the UK/EMU except for the UK CIPS report on services.