Yen Gets Bid on Zhou Comments - Will G-7 Bring More Strength?

[B][U]Talking Points[/U]
• Japanese Yen: Zhou comments drive USDJPY to 116.00
• Euro: Firm as stops tripped above 1.4250
• Pound: Retail Sales much better, chance of cut nearly nil
• USD: LEI and jobless claims on tap

Yen Gets Bid on Zhou Comments – Will G-7 Bring More Strength?
People’s Bank of China Governor Zhou Xiachoun moved currency markets today, particularly USDJPY which often acts as a proxy for yuan, after he stated that the Chinese currency will be eventually freely convertible and that he would not rule out raising interest rates in the near future. Mr. Zhou further noted that he had “sympathy for euro currency concerns.” suggesting that he agreed with ECB officials that Asia currencies are now significantly undervalued against the euro.
The news sent USDJPY lower by 70 points to test the 116.00 figure before bargain hunters stepped in. Mr. Zhou’s comments indicate that this week-end’s G-7 meeting will likely focus on the imbalances between Asia and Europe rather than addressing the recent weakness of the dollar vis a vis the euro. Despite the record highs in EURUSD, European monetary officials and even many European corporate executives are relatively nonchalant about the exchange rates, as European manufactures continue to perform well, unimpeded by euro’s strength. Today’s EZ Trade Balance which printed at 1.3 Billion versus 0 Billion projected, is testament to the health of the export sector. On the other hand, ECB authorities appear far more concerned about the state of the EURJPY cross which only a few days ago came within a whisker of its recent highs near 168.00.
With Chinese exports to Europe now exceeding those to the United States, European government and business officials are clearly concerned about the competitive disadvantages that are developing. As a result the EURJPY cross may be weighed down for the rest of the week as traders await the language from G-7.
The one countervailing force to this move could come from the equity markets. If DJIA makes another run for 14,000, the EURJPY may rally on carry trade flows. Nevertheless, Mr. Zhou comments introduced a new variable into the currency trading tonight which this week has been dominated mainly by risk aversion/risk appetite flows. If the G-7 does in fact highlight the undervaluation of the Asian currencies in its communiqué, the yen could strengthen against the dollar and the euro irrespective of the stock market moves.