Morning Forex Briefing

The USD is steady this morning after trading both sides of unchanged overnight. Initially firm in Asia, Yen carries were reset and USD/JPY climbed into areas of reported offers around the 118.80 area before settling back a bit; GBP/JPY and EURO/JPY both firmer as well. Japanese names were seen on the offer and rhetoric from European players softened the majors during European trade.

ECB president Trichet warned about excessive volatility in FX rates and reminded market participants about making “one way bets” again. Last time major G7 attendees or other significant members of the financial system mentioned this exact wording was near the end of 2006 and just prior to a whopping 800 point decline in the USD/JPY. If Trichet is hoping the signal to the FX community that the Yen weakness and EURO strength will be addressed or steps taken to reverse current trend it is important to remember that the overall fundamentals support both a stronger EURO and a Stronger JPY. It is likely that volatility will be seen for the near term but the safe play is to fade the USD for the pull.

GBP has an inside range day so far this morning suggesting a point of indecision for the short-term. I would look for cable to fade off today as longs book gains and flatten out for the weekend. EURO is also two-sided but managed to score yet another 2007 high overnight at 1.3639 before dropping off a bit. Offers appear very thick above the 1.3650 area and if EURO is attempting a new lifetime high expect it to be sold. Option barriers reside at 1.3650 and 1.3700 traders say; long-liquidation is very likely on a push higher today so be wary of a reversal if you are long. In my view, the USD is set for the retracement to correct the oversold condition against the GBP and EURO but is range trading against JPY due to the excessive interest in the Yen carry. I would suspect that you will see a lot of Yen dominated trade next week and I would look for the Yen crosses to cover a lot of the same ground twice.

Next week’s fundamentals will likely hold no surprises for the USD, housing will likely show continuing weakness as the bubble continues to burst in that sector, durables are not a closely watched indicator and likely to only cause a wobble, and GDP is expected to be on the flat side despite the recent IMF reassessment of potential growth. I think ahead of the GDP data on Friday you will see some book-squaring so early Monday’s trade may set the tone for the week. Look for the USD to remain two-way and range bound but with a slightly better tone for GBP and EURO. Back on May 7^th, thanks.

USD/JPY Daily

Long wicks with two-way action suggesting a lot of near-term fight over control, look for the rate to continue to find close in stops on each side creating two-way violent action. Sell rallies the best course in my view as the rate is whipsawing late carry players who won’t stay long. Close back under the 118.00 area likely to encourage the bears. Close over the 50 bar negates recent weakness I think.

GBP/USD Daily

Inside range doji formation after a doji top suggests a potential top is forming, look for a lower close today to end the week but weekly traders likely seeing a continuation breakout leaving the rate open for aggressive buying on dips. Look for close-in stops under the weekly low and a high volume break may indicate the start of a liquidating break. COT data vital now so check Futures O/I for liquidation.

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Jason
Jankovsky

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