Friday July 1, 2005 - 10:27:06 GMT
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Pound Bounces off Yearly Lows While Yen Squeezes Higher
The only trap set in the USD/JPY over the past week has been for yen bulls who have been squeezed mercilessly as the pair has relentlessly ground higher taking out the 111.00 figure despite generally positive economic data from Japan. Tonight’s trading is yet another case in point as both the TANKAN survey which printed at 18 and National CPI data which posted 0.2% y/y gain both beat expectations but the currency continued to decline against the dollar. Trading in the pair appears to be strictly driven by speculative carry trade flows as the dollar now enjoys 325bp interest rate differential against the yen. Nevertheless, to say that dollar rally is getting long in the tooth would be an understatement. According to our proprietary trend indicator, the rally may be within a day or two of petering out.
One source of support for dollar bulls is the fact that market positioning remains decidedly dollar positive. Our latest SSI sentiment data shows USD/JPY at –2.01 meaning there are more than two-dollar shorts for every long. This dynamic of everyone (including us) trying to pick the top is what has fueled the rise in the pair beyond seemingly reasonable levels. It’s probable that USD/JPY may hit 112.00 before yen bulls finally throw in the towel and the rally exhausts itself, but given the firming Japanese fundamentals we continue to believe that the risk in the pair is to the long side, for when it finally decides to retrace the up move the viciousness of the sell-off may catch dollar bulls by surprise.
Meanwhile the pound continued to set yearly lows hitting 1.7730 in European trade as market sentiment now expects a rate cut from BOE at next week’s MPC meeting. This week’s extremely disappointing data including a dive in CBI Distributive trades report to 22 year lows, a decline in consumer confidence to yearly lows and downward revisions in GDP which declined to 2.1% from 2.9% projected have all contributed to massive shift in market psychology. Tonight’ s rebound in PMI manufacturing to 49.6 from 47.8 expected was welcome relief to beleaguered cable longs which helped the currency regain the 1.7800 figure. However, the pound remains under pressure as market now entertains the possibility of interest rate convergence between it and the greenback. Unless we see near term dollar weakness, or the BOE stays resolutely pat at 4.75% any cable rallies are likely to be short lived.
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