[achiever]

Sell USD/JPY should, however, be a far safer bet from here than buying EUR/USD.

USD weakness dominates

Short term price action in FX has been dominated by unusually “pure” USD weakness in recent sessions. Unusual in the sense that USD is down against all G10 currencies this week, including JPY, marking the moves out as reflecting more than just falling market risk aversion. Options markets have moved quickly to extrapolate this USD-directional environment going forward with relative volatilities implying parallel USD moves in the majors are unusually likely.

• The risk of further USD weakness is not as symmetric across the majors as markets imply. In particular, shifting policy maker attitudes imply short USD/JPY is a far safer bet than long EUR/USD for investors looking to express a USD bearish view.

As EUR/USD pushes up to a new 2009 high and USD/JPY falls to a new six month low, the risk is far from symmetric for further USD losses against EUR and JPY. It is expected the new, consumer–friendly, administration in Japan to be far more tolerant of JPY strength than the outgoing LDP administration.

Conversely, EUR strength is likely to be causing the ECB increasing concern. After further attempts to talk down NZD by the RBNZ this week and the BoC again expressing concern on CAD strength, albeit in a slightly more dilute form, we may be much closer to the ECB’s exchange rate pain threshold than markets generally perceive.

In the ECB’s decade-long history, there have been three periods that could clearly be characterised by verbal intervention, by which we mean the President specifically mentioned the currency in the prepared statement at the monthly press conference.

1. The 10 months between February and November 2000, as EUR/USD broke below parity. 2. January and February 2004, as EUR/USD approached 1.30. 3. January to March 2005.

Looking back to previous instances of verbal intervention, it seems the ECB was sensitive to both the degree of exchange rate misalignment and to the speed with which it was rising or falling.