Revenge of the Low Yielders - Yen and Franc Continue the Rally

[B][U]Talking Points[/U][/B]

  • New Zealand Dollar: Wages accelerate on low unemployment
  • Australian Dollar: ANZ Job Advertisements fall 2nd month in a row
  • Yen: LEI at strongest level since March 06
  • Pound: IP and MP in line
  • Euro: German Factory Orders
  • Dollar: no events today

[B][U]Revenge of the Low Yielders - Yen and Franc Continue the Rally[/U][/B]
Currency markets continued to be skittish at the start of the week, as fears of more turbulence in global equity markets kept the low yielders well bid. USDJPY fell all the way to 117.19 at the start of Asia trade before recovering somewhat to 117.65 by early London session after the Nikkei bounced off the lows. Meanwhile Swiss franc traded at the best levels against the dollar since December of 2006 as safe haven demand pushed the unit higher.
If safety becomes the dominant theme in currency markets in the next few months then the Swiss franc will be the primary beneficiary of the change in attitude towards risk. With SNB expected to raise rates to 3% by end of 2007 the Swissie should become a much more attractive alternative to the ultra low yielding yen as the repository of safe haven funds.
Yen?s strength has come primarily from the unwind of the carry trades, rather than from any organic improvement in its fundamentals. On the other hand, Swiss economic data has been superb and as such the unit may be viewed my many market participants not only as refuge from the swirling structural problems of the credit markets, but also as a growth story on it own merits.
Meanwhile, the other majors ranged most of the night with EURUSD rising close to, but failing to take out the 1.3855 all time high. Traders are sidelined until Tuesday?s FOMC meeting, as they try to determine the Fed reaction to the latest problems in the housing sector. Although Fed fund futures have started to handicap the possibility of a rate cut by year?s end, most market participants remain neutral about the prospects of lower US rates, looking at Tuesday?s statement for some guidance. Should the Fed change its language hinting that it is open to a policy shift, the EURUSD may well take off. We continue to believe that if the EURUSD takes out the 1.3900 figure, 1.400 will then just be a matter of time as momentum buying tries to take out the stops resident at that level. For now however, the currency market remains in “show me” mode as it awaits the latest communiqué from the Fed.

Finally, the pound saw a very volatile session first dropping to 2.0378 lows at the start of Asia, only to recover to 2.0440 and then tumble once again below the 2.0400 level. On the economic front the IP and MP data printed in line offering no surprises to the market as the industrial sector continued to demonstrate improvement. However, a new outbreak of foot and mouth disease amongst UK livestock kept traders on edge. Last time this problem caused multi-billion dollar losses and a near 1000 point decline in the pound as UK authorities grappled with containing the outbreak. While the current situation appears far less dire, markets will continue to monitor the progress and any further bad news could weigh on cable as the week goes by.
[B][U]FX Past 24 Hours[/U][/B]