NEWS / Foreign Exchange

The Chinese dragon burns the dollar

The EUR/USD pair rose to new record highs during yesterday??™s trading. This happened without any news; it was the continuation of poor dollar sentiment that was enough to do the trick. This is becoming a one-way street in this pair as new records were set at the 1.4560 zone.

And that wasn??™t all, folks! This morning, the EUR/USD pair charged on to spike above the 1.46 mark. Indeed, the USD came under renewed pressure in Asian trading.

The Chinese deemed it necessary to come and tell the market it should balance the make-up of its FX reserves. Vice chairman of the committee of the National People??™s Congress, Cheng Siwei, said ???In terms of structure of our FX reserves, we should take advantage of the appreciation of strong currencies to offset the depreciation of weak currencies??™.

This was all what was needed to push the fragile and ???weak??™ dollar off a new cliff, with as a result new record highs at the 1.4630 zone.

There is obviously still a clear sell-USD-into-strength atmosphere, if strength can be found at all that is! Still, it isn??™t a panicky move we feel, as this could go on and we don??™t want to row against this powerful tide.

We also feel like Juncker said that the euro rise cannot go on indefinite. There should be some room for corrections. But how can one buy dollars at this stage, when even favourable data like the payrolls or ISM non-manufacturing have been ignored so bluntly? The disappointment in the dollar and the distrust is so big for now, it is difficult to see counter moves??¦

As EUR/USD rose, it went past synthetically calculated euro highs, since 1992, at 1.4570 zone for the ECU basket, and also past the strongest period of the Deutsche Mark in 1994, calculated at the 1.4550 zone. This demonstrates to us the overextended nature of this euro move, as it now has entered uncharted history??¦

Today, the market can take a look at US non-farm productivity and some Fed speakers for guidance, but most of these come late in the day.

The Chinese comments (discussed above) had the predictable impact, bringing the USD lower against the yen. USD/JPY dropped from the 114.60 zone to the 114 zone. Cheng Siwei, seeing the impact, tried to tone down his words, but this didn??™t seem to have an impact.

We felt the USD/JPY has unsuccessfully tested the 115.30 zone resistance last week. As it failed to sustain above this indicates that there is some downward scope in a buy-yen??“on-dip scenario near term.

Now that these comments helped the pair lower we feel a test of the downside should be possible, looking at the recent lows at the 113.25 zone in the first place.

The RBA met last night and decide to hike rates to 6.75%. What??™s more, due to the extraordinary strong eco data and jump in core inflation recently, they kept a hawkish tone. This was enough to help the Aussie to new gains and a new cycle high at the 0.9380 zone. As commodities such as gold go strong (835$/oz), this is also of help to the aussie, while oil (98$/brl NY!) helps the CAD.

The sterling received quite some bad news this week. As a consequence we??™ve seen the EUR/GBP tick higher. What is really doing the trick is the euro strength. The Chinese comments gave some excessive euro buying as it seems to be the favourite.

Last week we pleaded for some downward correction in EUR/GBP, down from the 0.70 zone. This has materialized with the pair falling back to the 0.6940 area. Yesterday the pair ticked up, under the influence of the bad news, to the 0.6960 zone.

The pair is still in a broad sideways mode between the 0.7028 and the 0.6894 zone, which we expect to hold short-term.

The risk for our scenario is an explosion in EUR/USD, which drags the euro along across the board.