Aussie buoyed by interest rate speculation

EUR USD (1.2760)
Last week’s low provided the single currency with some fresh demand yesterday as it edged up just ahead of the $1.27 level again. A lacklustre upside attempt in the European session could only lift it to 1.2775 where it stayed for the remainder of the NY session.

The EU Finance Ministers were up first yesterday and Luxembourg’s, Juncker, hinted that the current euro levels do not threaten exports, but that further appreciation may threaten the economy. Shortly afterwards his French counterpart more or less sung the same song. With the euro looking for some direction, and with hardly any significant economic data releases on the calendar, it had nothing else to rely on but these stale comments from EU officials that did not help it in any way. However, with the first uptick in the euro, traders could simply not resist to fall back on their favourite argument – diversification. This time Syria announced that it would end its dollar peg by the end of December to reflect closer trade links with Europe. It also added that it had already changed half of its approximate $4.1bn reserves into euros.
Apart from the fact that this does not leave it with a lot more to convert, this line of reason is simply an old one.

For many market participants, this argument was just available and they even went a step further to link it with the possibility of diversification in other Gulf states. In addition, this is also viewed as part of a bigger plan ahead of the launch of a planned single currency in 2010. Traders seem to forget that if all of this is true, it is still a couple of years away that is if the whole process runs on schedule.

For today we retain our outlook for the euro and would turn bullish at 1.2690 for a 1.2930/40 objective. We keep the risk-limit relatively tight at 1.2660 thereafter. The latter again marks the last good near-term support.


USD JPY (114.35)
The market is still awash with talk about the BoJ rate hike expected on Friday. However as traders sold the yen yesterday, they started to take a rather pessimistic view on the size of the rate hike, with many now looking for something between 10 and 15bp. In addition, they were also quick to turn to geopolitical risk and even singled out Koizumi’s call for a quick decision on sanctions against North Korea as limiting the yen gains. However, with no new turn on the issue it is hard to believe that this is the case.

The dollar is currently consolidating between 113.45 and 116.70. A break of the lower threshold would encounter supports at 113.10 and 112.75. We still subscribe to a bullish strategy at the first mentioned point with a limit below the latter. Resistance is visible at 114.90 and beyond the 115.30 supply point the recent downward correction should have run its cause. This could see the dollar appreciating further than the upper threshold.

EUR JPY (145.95)
The cross received some temporary support ahead of 145.00. So far the recovery was not convincing and the position has not stabilised yet. To the downside, we reckon with supports at 144.70 and 144.10, which also mark the current risk. Overhead, be on the lookout for resistance at 146.70/75, beyond which another attempt to fresh highs at 147.90 would be likely.

EUR GBP (0.6920)
The single currency remains in a neutral position. We expect to run into downside supports at 0.6895 and then at 0.6845/60. We would still take advantage of a bullish strategy at the latter with a tight limit below. Be on the lookout again for resistances at 0.6945 and 0.6980.

GBP USD (1.8450)
Sterling recovered after the announcement yesterday that the UK’s deficit had widened. For the moment it still remains in a neutral and stable position. To the downside, we expect to come across some buying interest at 1.8350 and thereafter at 1.8275. However, we still need a break of 1.8575/80 to signal immediate upward continuation towards 1.8775.

AUD USD (0.7540)
The current target remains 0.7595. The Aussie remains buoyant as the latest consumer confidence number has put the possibility of another RBA rate hike on the table. Beyond the objective, one can already look for 0.7650. We expect to come across support at 0.7505. On a dip our tightened 0.7470 risk-limit should not be violated.