The Euro: Four Points To Consider
With the Fed meeting and
the release of the Tankan report later today in Japan, most traders
are hanging near the sidelines, although the action in New York this morning was
rather interesting despite a poor showing on the trade deficit, such are the
markets as we await data in a market gearing up to close the books and go on
holiday. A couple of points worth noting however:
USD/JPY:
Despite most traders talking about Japanese
exporters being sellers at 105-105.20 they seems to have stood back as the
dollar has rallied in the last hour or so. Most talk now id that buy stop
orders above 105.50 will take us to 106 where there will be exporter selling.Â
All hinges on FOMC at 11:15 AM PDT and Q4 Tankan at 3:50 PM PDT.
EUR/USD:
Last week the ECB issued a statement that did not
get too much press, but upon further review there is some insight to be gained.Â
The most notable fact was that the language was nearly identical to the language
leading up to the last intervention in 2000. Central banks know all too well
the consequences of suggesting the possibility and not following through. With
that in mind, we need to be diligent if and when the EUR heads back towards
1.3500. Points to consider:
-Â the 2000 intervention, while
coordinated, was at a time when they were supporting a weak currency, always
more challenging than weakening a strong currency. Consider the following quote
from the Royal Bank of Scotland;
“First of all, there is no
problem of running out of reserves, as finding domestic currency to sell is not
a problem. The only issue is whether the intervention is sterilised or
unsterilised. If unsterilised, you are effectively printing money to buy foreign
currency. This accumulation of reserves is in this case effectively costless,
but unsterilised intervention means lower interest rates (unless they are
already zero) and potentially higher inflation. The alternative of sterilised
intervention involves borrowing domestic currency to buy foreign currency. If
the domestic currency subsequently rises, this is costly, especially if interest
rates in the domestic currency are higher than those abroad. Intervention in an
attempt to weaken strong currencies usually involves buying higher yielding
currencies, as is rarely the case that strength in high yielding currencies is
unwelcome, as yields are usually high because the economy is strong and/or
inflation is high.”
-Â while the US appears to want a weaker dollar,
they mainly prefer that to be the case versus Asian currencies, not the EUR per
se. They recognize that any economic set backs in Europe due to a strong
currency will not be in anyone’s interest.
-Â either coincidental or part of ECB policy but
the current level of the EUR is roughly 25 big figures away from the OECD PPP
estimate of EUR 1.11, in 2000 the level of the EUR/USD was 0.86
-Â the intervention in 2000 was successful to the
tune of a 3% move higher. US Fed cooperation would likely make this even more
plausible this time.
Just some thoughts, but a nice way to brainstorm
about possibilities as we round out 2004 and await more data later today.
As always, feel free to send me your comments and
questions.
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