Morning Forex Briefing

In a surprise move over the weekend, the PBOC raised interest rates 27 BP taking the one year deposit rate to 2.79% and the one year lending rate to 6.39% respectively. Initially Asian markets responded by selling USD/JPY into lows around the 116.20 area but importer demand possibly linked to year-end repatriation lifted the rate off the lows and general cross-rate spreading kept USD/JPY firm all the way to the New York open. USD/CNY was priced at 7.7351 today and marks a fresh high against the Greenback since the July 2005 revaluation. Concerns that the Chinese economy could overheat this year was most likely behind some of the move and the Chinese government has made it clear in past months that their primary concern in 2007 is to control the growth of credit in an attempt to slow growth. China’s record trade surplus is a drain on global trade and concerns that the revaluation of the Yuan will not keep pace with the need for a correction in the trade imbalance makes the rate hike welcome by most traders.

USD/JPY will likely be the biggest winner and a sharp spike higher in Yen value is what most analysts are expecting. USD/JPY is holding just under the 117.50 area at the overnight highs in early New York trade. Cable is firm to higher after a brief probe under the 1.9400 handle; low print at 1.9385 was expected to find bids. Offers said to be resting between 1.9480 and 1.9500 on option-related defense but traders are more interested in the Yen pairs.

GBP/JPY rallied hard for a high print at the 228.60 area after marking a low at 225.38 only a few hours earlier. Traders expect additional volatility moving forward so GBP is expected to remain two-way for the near-term. EURO has had a tighter range, low prints at 1.3279 and highs only slightly better at 1.3327 and covering that ground several times in solid two-way trade. Traders note that EURO is poised to tackle reported offers in the 1.3400 area and as long as the 1.3280 area holds as support a rally could develop this week. The BOJ wraps up their policy meeting with no rate hike expected tomorrow and the FOMC ends theirs on Wednesday. Between now and then we have housing starts which are expected to show a drop so the news is not going to be market moving in my view. I think technical trade is more likely and if the BOJ and FOMC statements don’t vary much from previous tone then I expect solid two-way trade for the Greenback this week.


R3: 1.9530/40

R2: 1.9500

R1: 1.9480

Current Price : 1.9443

S1: 1.9380/90

S2: 1.9350

S3: 1.9300

Market sharply two-way as traders digest the PBOC news, potential bear pennant forming between the 118.10 area to the upside and the 115.50 area to the downside. Traders look for option defense and exporter selling above the 117.80 area to possibly 118.00; stops said to be thick at the 118.20/30 area. Yen strength likely after a hawkish statement from BOJ tomorrow but bids under 116.00 firm.


R3: 118.00

R2: 117.80

R1: 117.60

Current Price : 117.40

S1: 117.10/20

S2: 116.90

S3: 116.50

100 bar MA offering some near-term resistance but stops above the 1.9500 area likely to draw additional buying; GBP/JPY cross likely to influence GBP/USD also due to interest in the JPY side. 50 bar MA likely to offer additional resistance so a pullback from there needs to be low volume to hold bullish hopes alive. Bids at 1.9350 and more at 1.9300/10 area.

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