Euro Frustrates Both Bulls and Bears, Yen Sold as Risk Appetite Returns

Talking Points
• Japanese Yen: Reverses early strength
• Swissie: Industrial Production barrels higher
• British Pound: Rightmove shows demand for housing unabated
• US Dollar: Waiting for NAHB

Euro Frustrates Both Bulls and Bears, Yen Sold As Risk Appetite Returns
USDJPY produced a major reversal at the start of the week tonight, first gapping lower on the news that the central bank of China raised rates 27bp on Saturday only to quickly stage a massive rally as the Nikkei and other Pacific Rim markets posted strong gains. As we noted in our weekly, “The single most correlated trade in all of finance over the past two weeks has been the relationship of the USDJPY to global equity markets. The moves were so uncannily parallel that CNBC began showing the tick by tick comparisons of the two charts on an hourly basis. As equities rose and risk appetite returned USDJPY rose as well and when equities sold off so did the currency pair. “
Although this relationship may well continue into this week, tomorrow’s BOJ monetary policy decision may bring the focus back to economics. While no one anticipates a hike, traders will want to see if the central bank is open to the possibility another 25bp hike before the June parliamentary elections. Japan’s PM Abe recent comments created controversy about Japan’s action in WWII sparking protest in the region. Given such a delicate state of affairs the BOJ may be reluctant to aggravate an already incendiary political situation by pursuing an active monetary policy that could threaten the budding economic recovery. On the other hand, with PBOC announcing yet another rate hike over the week-end, the pressure on BOJ to tighten its own monetary policy has clearly increased. By remaining too accommodative as Japan’s economic growth returns, the central bank threatens to undermine its own credibility and may be in danger of falling behind in its control of inflation. Yet the majority of the currency market clearly believes that in this conflict between political consideration and economic need the BOJ will likely abide by tradition and remain on the sidelines until the elections are over. Thus, USDJPY rose more than 100 points off the lows as the carry trade came back with vengeance. Still, tomorrow’s press conference will well worth watching for any potential surprises.
In Euro-zone, the euro continues to tread water, frustrating both bulls and bears as the pair failed to take out either the 2006 high of 1.3348 or the downside support at 1.3260. With no economic news on the calendar, the price action was driven by commentary from ECB member Garganas who corroborated the hawkish position shared by many of his colleagues. The ECB appears to be preparing the market for hikes beyond the 4.00% level, as growth in the region remains strong (German February tax receipts increased 16.7%) and the central bankers continue to be concerned about rising labor costs. If the ECB continues to maintain and aggressive monetary policy into the second half of 2007, the news should bode well for euro longs who will benefit from the narrowing of US/EZ interest rate spreads.
Finally the pound saw some strength today, especially in the crosses where it gained against the euro, swissy and the yen, as the Rightmove survey showed a very strong 12.2% year over year increase in housing. The data, according to Rightmove officials, suggested that despite persistent BoE tightening demand for UK housing remains unabated driven by demographic factors and lack of supply. “"Crucially [the BoE] cannot address the increasing demand for housing driven by the needs of a growing population" said Rightmove Commercial Director Miles Shipside.
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