- The USD Index rallied about 1% last week as expectations for Fed easing have stabilized and the employment decline was not as large as expected. While the Fed want to end the easing process, expectations for tightening before yearend remain excessive. While the USD has probably bottomed, further gains in the near term remain unlikely, and market continues to expect the downside USD adjustment will increasingly shift toward Asian currencies.
- Weaker Euro zone economic reports have taken the trade-weighted EUR down about 2% from its April 22 cycle high. While the economic momentum in 2Q 2008 is clearly softer, it will be difficult to disentangle the impact of the strong EUR, weaker foreign growth and a return to normal weather following an unusually mild winter. In this context, ECB policy is likely to remain firmly on hold and further EUR losses are unlikely in the weeks ahead.
- While the housing sector continues to weaken, the 10-year low in the trade-weighted GBP is beginning to aid the UK corporate sector and raise Bank of England concerns about future inflation risks. As a result, the GBP has rebounded about 3.5% versus the EUR from its April 16 low and re-established a relative value that seems in line with relative interest rate expectations. In this context, the GBP is likely to stabilize versus both the EUR and USD during the weeks ahead.
- The JPY continues to weaken on a broad-based improvement in risk appetite as global liquidity conditions remain abundant. USD/JPY has now rebounded almost 10% from the low on March 17, with the 95.78 low marking the 76.4% retracement of the 1995 to 1998 USD/JPY surge. With the BOJ expected to keep rates policy unchanged, movements in the JPY are expected to remain dominated by global risk appetite, and mafrket continues to expect very limited JPY gains in the weeks ahead.
Currency Strategy - May 4th, 2008
May 4th, 2008 · No Comments
Tags: FOREX Strategies
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