High yielding currencies recover as risk aversion cools

ACMforex · July 31, 2007, 4:46am

<TABLE class=tborder cellSpacing=1 cellPadding=6 width=“100%” align=center border=0><TBODY><TR><TD class=alt1>High yielding currencies recover as risk aversion cools

Concerns that turmoil in the US sub-prime mortgage sector have spilled over into the wider credit markets prompted traders to buy Yen last week and earlier on Monday, closing carry trades.
Along with credit worries and US economic data, currency trading may be impacted by pending interest rate decisions from the European Central Bank and Bank of England. The ECB and BoE are expected to keep rates on hold at 4 percent and 5.75 percent, respectively, this week, although both are still seen rising rates at least once more this year.
In the United States, interest rate futures are building on last week’s gains and driving down the implied fed funds rate. Futures have fully priced in a 0.25% rate cut from the Federal Reserve by the end of 2007 and at least one more by June 2008.

News and Events:
The Japanese yen fell on Monday, reversing early gains, as U.S. stocks rallied at the end of a volatile session, tempering fears of deteriorating credit markets. Concerns that turmoil in the US sub-prime mortgage sector have spilled over into the wider credit markets prompted traders to buy Yen last week and earlier on Monday, closing carry trades. Carry trades involve borrowing in low-yielding currencies to buy higher-yielding assets, and the low-yielding yen has been the main beneficiary of a carry unwind. Analysts said “Trading in UsdJpy will be very much dictated by what happens with the stock markets this week”.
Yesterday, UsdJpy hit three-month lows of around 118.03 and EurJpy 160.65 low. But by late session in New York, UsdJpy traded back up to 119.22 and EurJpy up to 163.58 as stock indexes rallied. The Swiss franc, another low-yielding funding currency, rose 0.45% against the dollar to 1.2027. Gains in U.S. stocks, though, had little impact on the Euro. The EurUsd was up 0.63% at 1.3722, while GbpUsd was up 0.31% at 2.0311. The Australian and New Zealand dollars earlier slipped to one-month lows against the greenback as a heavy level of risk is continuing to weigh on the higher-yielding currencies such as the Aussie and the Kiwi. In the last several weeks, evidence has surfaced that the once-contained US sub-prime crisis has spread to higher-grade credits. A widely watched index of investment-grade credit default swaps was 20 basis points wider on Monday, showing investors were demanding more of a premium for holding the securities. Also the iTraxx Crossover index, the most closely watched barometer of European credit sentiment, yesterday traded at an all-time high, showing that credit problems have made their way across the Atlantic. Along with credit worries and US economic data, currency trading may be impacted by pending interest rate decisions from the European Central Bank and Bank of England. The ECB and BoE are expected to keep rates on hold at 4 percent and 5.75 percent, respectively, this week, although both are still seen rising rates at least once more this year.
In the United States, interest rate futures are building on last week’s gains and driving down the implied fed funds rate. Futures have fully priced in a 0.25% rate cut from the Federal Reserve by the end of 2007 and at least one more by June 2008.
The focus now may shift to U.S. economic data due this week, including Today’s release of the core PCE Price Index, a closely watched inflation gauge, and Jobs data on Friday.

Today’s Key Issues (time in GMT):

<SITE>[B]09.00 EUR[/B] July Euro zone Consumer Sentiment -2 vs -2
[B]09.00 EUR[/B] July Euro zone Economic Sentiment 111 vs 111.70
[B]09.00 EUR[/B] July Euro zone Industrial Sentiment 5 vs 6
[B]09.00 EUR[/B] July Euro zone CPI 1.9% vs 1.9%

[B]09.30 UK[/B] July GfK Consumer confidence -5 vs -3

[B]12.30 US[/B] June Personal Income +0.6% vs +0.4% </SITE>
[B]12.30 US[/B] June Core PCE +0.2% vs +0.1%
[B]12.30 US[/B] 2Q Employment Cost Index +0.9% vs +0.8%

[B]12.30 CAD[/B] May Gross Domestic Product 0.4% v 0.3%

[B]13.45 US[/B] July Chicago Purchasing Managers Index 58 vs 60.2

[B]14.00 US[/B] July Consumer Confidence 105 vs 103.9
[B]14.00 US[/B] June Construction Spending 0.2% vs 0.9%

The Risk Today:

[B]EurUsd[/B] extended losses from Friday down to 1.3610 on Monday but reversed recent losses in yesterday US session up to 1.3722 +0.63%. The break below 1.3750 from last week marks the initial resistance and put 1.3659 former resistances in sight. Initial minor support holds 1.3610 yesterday low. Renewed uptrend may refocus the way upward 1.3925 and 1.3986 resistances.

[B]GbpUsd[/B] reversed part of the last two days after touching 2.0182 low yesterday. Sterling was up +0.31% yesterday at 2.0311. Renewed weakness in recent trend from 2.0654 26-years high will put 2.0100 support (former trend resistance) in sight. A break there will open the door back down to 2.0000 pivot point. Initial resistance holds 2.0494 Friday high. Initial resistance marks 2.0494 level.

[B]UsdJpy[/B] lightly rebounded from Thursday 118.01 and Monday 118.03 lows to yesterday 119.22 +0.38%. The risk of further downtrend remains; the recent test of 118.50 pivot point may accelerate the slide to 116.58. Initial minor resistance holds 120.78 pivot hit last Tuesday.

[B]UsdChf[/B] remains in last two weeks market 1.1962 to 1.2157 range. Market tested 1.2157 resistance (retracement of 1.2471 � 1.1962 decline) but returned under 1.2082 (23.6% retracement). Sentiment remains for further advance toward 1.2217 (50% retracement). Renewed down trend, may shift on 1.1881 early December low and 1.1739 April 2005 trend supports.

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Resistance and Support:

By[B] Jean-Claude Braha [/B]- ACM Advanced Currency Markets, Geneva, Switzerland

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