Foreign Exchange traders are still not willing to buy euros

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The US Dollar Exchange Rate lost ground against the euro from the Asia open late Tuesday/early Wednesday to the New York close yesterday (1.2524 to 1.2664). As we have seen a few times recently, the Asian open last night reversed the US action and the euro exchange rate is now straight-lining back toward the Wednesday low and has recovered a little over 62% of it so far as Foreign Exchange traders are still not willing to buy euros. At 7 am it is also on the linear regression of the hourly chart, i.e., on trend.

This morning the ECB cut rates by 50 bp to 1.5%, as expected, and some analysts expect Trichet to announce additional cuts at the press conference later this morning, reserving any mention of quantitative easing for a later occasion. It’s the lowest rate since the euro was formed in 1999.

We were willing to buy into the idea of a rising euro in part because risk appetite came back - see stock market results below - and the usual beneficiaries, the Australian Dollar and Canadian Dollar, put in breakout moves. The Candian Dollar exchange rate moved over 200 points from 1.2944 at 6 am ET to 1.2709 by 3 pm. This is a sufficiently big and rare move to make anyone sit up and take notice. The Australian Dollar Rate also moved big, from 62.89 Tuesday night to 65.28 by 3-4 pm in New York yesterday. At a guess, if China had announced an additional stimulus plan, the rumor du jour, these moves could have continued and we would have been at risk of a more lasting breakout. Even the normally sedate Swissie broke a resistance line.

Another reason not to cling too hard to the standard analysis - a rate cut always harms a currency - is that in recent months the standard analysis has been wrong. Rate cuts can be good for a currency if the market likes the take-charge message.

We were similarly fearful of a sterling bounce since the pound seemed to have real support just over the 1.4000 level in recent days. But after rising along with the rest of the currencies yesterday (1.3981 late Tuesday night to 1.4234 at the 3 am handoff from Asia to Europe today), sterling has fallen back to the 1.4000+ level at 7 am.

This is a response to the BoE rate cut of 50 bp, as expected,

along with announcement of quantitative easing that was supposed to mitigate the cut. It didn’t, mostly because the amount was too small (£75 billion when the market wanted £100) and the timetable too slow - three months. Besides, yesterday the Treasury auctioned 30-year Gilts to the worst reception in 10 years, says the FT. The price fell and yields rose 20 points on worries that appetite will not match huge issuance this year--£146.4 billion, or triple the amount in 2008.

The yen continues to creep toward manifest destiny at 100, but with reluctance. The 200-day moving average lies just over 100 and a lot of people take it as gospel that the 200-day means something. Many tedious hours of back-testing tells us that 200 days is not a meaningful number in stock indices or in currencies, but never mind—it symbolizes “long-term,” and that’s that. The rise in risk appetite yesterday that carried stock indices upward also took the carry-trade currencies Australian Dollars and Candian Dollars up against the yen.

We are considering adding AUD/JPY to our list as a proxy for the carry trade.

Please write if you have a view.

Pounds to US Dollars = 1.4120
Pounds to Euros = 1.1244
Euro to Pounds = 0.8895
Pounds to Australian Dollars = 2.1980


Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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