Tuesday June 14, 2005 - 10:26:26 GMT
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Euro Bounces while Yen Teeters on Breakout
Although Japanese economic data has continued to show steady albeit very slow economic improvement over the past few weeks, USD/JPY has inexorably moved higher reaching 109.60 in yesterday’s trade. What’s going on? Ironically some analysts have blamed recent yen weakness on the poor performance of the euro. The reasoning goes as follows: with European assets declining sharply in value due to euro’s massive drop, many Japanese investors trimmed their European holdings and rotated back into American assets, driving USD/JPY higher as a result. The pair now stands perilously close to breaking it’s triple top and should it vaunt through the 110 level many dealers expect it to reach 112 soon thereafter. With the Fed expected to raise rates another 25bp higher in the June the greenback will enjoy a 325bp differential to the yen and the pair is likely to attract additional carry trade interest. We have been positive on the Japanese economy, believing that the country may have finally turned the corner from its protracted deflationary state, but if USD/JPY convincingly takes out the 110 figure the break out would have to be respected.
Meanwhile a listless session in the Euro-zone tonight as EUR/USD ranges between 1.2110 and 1.2140 levels, but true fireworks occurred during the US session yesterday when the pair hit a low of 1.2027 before short covering and bargain hunting pushed it back above the 1.2100 figure. If EUR/USD could hold yesterday’s lows, the sharpness of the bounce suggests that the pair may have made a temporary bottom as negative euro sentiment reached a crescendo. Tonight’s EU Construction Output data which saw the biggest decrease in 7 months was hardly euro bullish, but the single currency ignored the results with traders focusing on US PPY and Advanced Retail Trade numbers which are both projected to show month over month declines. With euro-pessimism seemingly exhausted for the time being, the market may turn back to trading off US fundamentals.
FX Spot Overnight
- EUR holds the 2100 figure as it consolidates the bounce
- JPY trades above 109 as traders contemplate the 110 level
- GBP takes out the 8100 figure on hawkish BOE comments
- CHF drops below 2700
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