Since the G20 had a soft impact on the foreign exchange market and the German elections results were as expected, the markets are likely to focus on comments from officials of the US Federal Reserve, the ISM figures and the US Employment Report at the end of the week.
The US dollar, after having been bullied during the month of September, is regaining ground following market expectations that the US could raise interest rates before other Western countries, which should prompt a renewed appetite for the greenback. This is also supported by an unexpected declaration by the President of the European Central Bank, Jean-Claude Trichet, who claimed that a strong dollar is important for the global economy.
The pound sterling has plummeted nearly five per cent against other currencies since the beginning of September; the pair of sterling against Japanese yen fell from 152 to 140, a drop of nearly eight per cent; while the euro appreciated from 0.8800 to 0.9300 against sterling, a loss of more than five per cent for the pound. The decline of the pound was supported further by the recent statements by the Governor of the Bank of England, Melvyn King, and chief economist, Spencer Dale, who welcomed the lower pound in recent weeks.
The minutes from the September MPC meeting evidenced a 9-0 vote for maintaining the base interest rate unchanged at 0.50 per cent and to keep the purchases of “Gilts” at £175 billion. However, Mr King and Mr Miles (a member of the MPC), who had voted for an increase of £25 billion “Gilts” purchases in August, recalled that an increase was justified. We believe that the UK authorities should be called again to further increase their purchases of “Gilt” (A bond issued by the UK government. “Gilts” are the UK equivalent of US Treasury securities) to compensate for the general stagnation of growth in money supply in the British economy, probably as early as their next monetary policy meeting in November.
The pound should continue to suffer the onslaught of investors, especially against the Japanese yen and the euro. The parity of €1 to £1 is again in discussion by FX Traders; €1 to £0.98 was reached in December 2008.
Another topic that is animating the discussions in the halls of the FX market is: “Is an intervention by the bank of Japan necessary to stop the rising Japanese yen?” The Japanese yen is close to reaching its highest against the dollar this year at 87.11, reached in January 2009 and most importantly is approaching dangerously the high reached in April 1995 of 79.70.
The Minister of Finance, Hiroshisa Fujii, made a number of observations that have minimised the risk of intervention to halt the yen. However, Toyoo Gyothen, special adviser to the Ministry of Finance and former vice finance minister for international affairs, recently said he does not exclude an intervention. Our opinion is that, although “Gyothen” is pronounced identically to a Japanese word that means “surprise”, Japanese authorities should not intervene in the foreign exchange market before USD/JPY levels reach 85.
They should be satisfied with statements similar to Switzerland and Great Britain which explicitly (in the case of the SNB) or implicitly (in the case of the BoE) talked about their satisfaction with a weaker currency. The Japanese yen should continue to be favoured by investors and the pair of sterling against the yen seems very vulnerable.
Upcoming FX Key events:
US data will be the focus this week with payrolls expected to show continuing improvement tomorrow. The personal income and spending report, ISM manufacturing and construction spending are released today. Other key data include Japan Tankan and UK manufacturing PMI (today).
FX Technical Key points
EUR/USD is bearish, target 1.4420, key reversal point 1.4850
USD/JPY bearish, Target 87.10, key reversal point 91.70
GBP/USD is bearish, target 1.5050, key reversal point 1.6200
USD/CHF is bearish, target 1.0150, key reversal point 1.0550
AUD/USD is bullish, target 0.9000, key reversal point 0.8600
NZDUSD is bullish, target 0.7550, key reversal point 0.7000.
Mr Longchamp is head of trading at RTFX Ltd.
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