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Trichet’s hawkish comments keeps focus on interest rates

Earlier in the week, European Central Bank president Jean Claude Trichet reinforced interest rate expectations for a rate rise as early as next month. Mr Trichet said that the eurozone inflation rate is “durably” above the central banks’ target.

The euro remained supported against the greenback despite risk sentiment souring on Monday and Tuesday on renewed concerns over unrest in Libya and the Middle East as well as concerns over Japan’s fight to contain the nuclear crisis after the discovery of plutonium in the soil at the Fukushima nuclear plant.

EUR/USD has traded in a range of 1.4022-1.4149 this week up to the time of writing. The pair has established a rising channel from its February lows on the daily chart, with the next target to the upside being the November 2010 high at 1.4282. A break of this level should see the pair trading to the top of the rising channel now in the region of 1.4370. Incidentally this area also represents the 76.4 per cent Fibonacci retracement of the move from 2009 high to 2010 low at 1.4373.

The euro is expected to continue to be driven by interest rate expectations in the short to medium term especially if the ECB goes ahead and raises interest rates next month as is widely expected. So far this year, the single currency is up against all of its major rivals. It has recorded an increase of over five per cent versus the dollar, around 2.50 per cent against sterling, over six per cent against the yen and around 3.50 per cent versus the Swiss franc. Reasons for caution by the ECB however still exist, as concerns over the eurozone debt crisis remain very much alive. Portuguese yields hit another record high on Monday; this after Standard & Poor’s and Fitch both downgraded Portugal’s credit rating last week and after Portuguese Prime Minister stepped down after a proposed austerity plan by his government was rejected in Parliament.

The USD did find some support on Tuesday on hawkish comments by Federal Reserve official James Bullard. Mr Bullard, the St. Louis Fed President, said the Fed’s $600 billion quantitative easing (QE2) programme may be trimmed by some $100 billion. Further comments about the possibility of a cut of QE2 pushed the dollar higher versus the euro and the yen, but bids around 1.4050 on EUR/USD were seen slowing down the dollar’s rise.

After finding support initially, the yen was swept across the board on Tuesday. The yen was supported against the dollar earlier on safe-haven flows, but news of the worsening situation in a Japanese nuclear plant weighed on the Japanese currency and shifted “safe-haven” bets in favour of the Swiss franc.

The USD/JPY reached highs of 82.47 by the time of writing breaking first and second daily resistance at 81.93 and 82.16 respectively as news of the high possibility of leakages from fuel rods at the plant hit the wires. RTFX TraderTip suggested signs of a corrective recovery to at least 82.88 or 83.46 in its monthly scenario for USD/JPY.

The Canadian dollar continues to surge higher this week, while continuing to ignore geopolitical tensions in Libya and the Middle East, as well as Japan’s nuclear crisis. The Loonie is well bid so far in the week, despite Friday’s stumble against the USD after the collapse of Canadian Prime Minister Stephen Harper’s conservative government.

The rise of the Loonie is being attributed to the surge in commodity prices, which saw gold reach record highs while crude oil hit a two week peak last week.

Spot Gold (XAU/USD) reached a record high at $1,447.80 an ounce last Thursday as geopolitical tensions and expectations of extended loose monetary policy by the Fed sparked increased risk aversion. But a slight return of risk sentiment on Friday and Mr Bullard’s comments on Tuesday has seen XAU/USD retreat slightly from its historical highs. XAU/USD traded in a range of 1,429.70 – 1,410.25 so far this week.

Finally, the British pound has been under pressure so far this week, and at the back end of last week, on expectations that an interest rate hike by the Bank of England would lag that by the ECB. Cable is down more than half a per cent versus the greenback, reaching a five month low at 0.8836, and is down 0.30 per cent on the week versus the euro, and down almost one per cent against the Loonie. RTFX trend is bearish on most of GBP crosses, with the largest gain recorded so far at over two per cent on GBP/CAD. On GBP/CHF, the trend is bearish since March 11 with a recorded gain of more than 1.50 per cent.

Upcoming FX key events:
Today: German Unemployment Change, Canadian GDP & US Factory Orders
Tomorrow: EZ Unemployment Rate, US Non-Farm Payrolls, US Private Payrolls, & US ISM Manufacturing Survey

FX Technical Key points:
EUR/USD is neutral.
EUR/GBP is bullish, target 0.8950, key reversal point 0.8200.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.8850, key reversal point 0.9500.
AUD/USD is neutral.
NZD/USD is neutral.

Please feel free to send any comments or feedback regarding our articles on [email protected].

RTFX Ltd (“RTFX”) is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

www.rtfx.com

Mr Xuereb is a trader at RTFX Ltd.

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