The yen gains big on risk aversion

The EUR/USD pair again rose to new record highs during yesterday??�s trading, reaching the 1.4730 zone, before being struck back on some profit taking.

In the morning already the pair surged to new highs as the Chinese talked about diversification. This apparently set the tone for further trading as the upside came under further tests and caved in. The pair ticked up to new records once more, without any fresh news. The pair reached the 1.47 zone. There is obviously still a clear sell- USD-into-strength atmosphere.

The move of euro yesterday seemed a bit over the top though, a bit like an exhaustion move. The fact that the pair than came back down fast on profit taking shows we are not the only ones with this concern.

French President Sarkozy also shares this concern. On a visit to the US he urged the US should maintain its strong dollar policy and made a concealed threat, saying that ???monetary disorder risked turning into an economic war???.

The market however should be more worried now about renewed financial turmoil. GM had a big loss and a lot of US financials yesterday came in the spotlights with bad news. Morgan Stanley had some more write-downs (3.7 B $) to make, Merrill Lynch had some more confessions to make on its exposure to CDO??�s and subprime debt, Washington Mutual announced more losses related to subprime exposure,??�. This should be a drag on the USD, as long as the problems stay stateside that is, as EMU financials are also busy reporting these days.

The dollar should also feel less supported as a Fed rate cut for December is again coming closer in al this turmoil. Also note that traditional hawk Poole has indicated a rate cut possibility??�

Today, the calendar is again not the busiest data-wise, except for the ECB. Many will be waiting for Trichet??�s comments of course (see EUR/GBP part below for details). Attention should also go to developments in financials. Of course, also someone named Ben Bernanke will testify before the JOC??�.

USD/JPY dipped sharply yesterday on the renewed risk aversion. Stock markets in the US plunged as a consequence, with the Dow Jones losing 2.6%. This morning the Nikkei went down 2.3%. USD/JPY sank from the 114.50 zone to the 112.50 area??�

The strength of the yuan versus the dollar, coming on the day of the comments of Siwei on forex reserves diversification, shows the concern on the weaker dollar is very real in China and they will take action, or, more likely, are already taking action??� This is a positive for the euro, the sterling and the yen.

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. The fact that now the USD/JPY pair has also broke below the 113.25 neckline of a double top shows more downside with targets in the 110 area, the lower boundary of the medium term sideway pattern stands at the 111.60 zone (August low).

Emerging currencies are now also being hit back and this may show that for the first time in all this turmoil over the past months, the concern is digging deeper than the surface. This is an issue to be followed closely as it may indicate something more fundamental is changing. Look at EUR/TRY for instance rising sharply, or the aussie and the kiwi dollar losing against the dollar yesterday in late trading??�

The EUR/GBP pair dipped slightly, ending at the 0.6965 area, as the EUR/USD pair cooled during the course of the day after a very hot start.

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. Even in all the pro-euro violence of these past few days, the EUR/GBP pair has not been able to break the upward boundaries; for us this is a confirmation of the sideways bias in this pair.

The BoE should leave rates on hold at 5.75%, so then all the focus should go to the ECB. Trichet will be watched to see how he handles the situation regarding growth/inflation, financial turmoil and the strength of the euro. We expect the ECB to remain on hold at 4.00%, but it is obvious that his comments on these various subjects have market moving potential. Look out for words such as ???strong vigilance??� and ???accommodative??? for instance??�.(see the ???European bonds??� part for further details on our view)