Market Rumours

Sterling has lurched sharply lower after Bank of England governor Mervyn King noted in a press conference accompanying the BOE's quarterly inflation report that recent sterling weakness would be supportive to an export-led recovery. This is not the first time that King has referred to sterling weakness in these terms. Nonetheless, the pound sank from a spike to $1.6798 against the dollar to the $1.6660 area.

USD/JPY, EUR/JPY rising due to Fitch's comment that "could downgrade Japan if government bond issuance rises rapidly," but no big lasting impact on pairs expected for now as a cut would be very unrealistic, at least in near term, says Yuji Saito, head of FX at Societe Generale. Though adds JPY may take hit if government increases JGB issuance over around Y50 trillion next fiscal year. Japanese officials have recently been saying government to issue no more than Y44 trillion of JGBs next fiscal year. USD/JPY last at 89.94, higher than 89.76 before Fitch remark. EUR/JPY at 134.87, higher than 134.52 before remark.

The euro is unlikely to make it to a new 2009 high over $1.5060 now. In fact, even a sustained break over $1.5000 probably won't happen as the single currency continues to lose upward momentum. Over the last few days there were plenty of reasons for the euro to rally quite strongly. But, the currency's performance has been fairly feeble.On Tuesday, Dutch Finance Minister Wouter Bos said he never worried about the euro. "We always wanted a strong euro and now we have one. We shouldn't complain." The latest ZEW survey from Germany, the region's strongest and largest economy, drove this point home. Instead of reflecting the recent strong rise in production and exports, the survey's economic expectations index tumbled this month even more than the market had anticipated. "Earlier enthusiasm is now gradually giving away to realism," said Carsten Brzeski, a senior euro zone economist with ING Financial Markets in Brussels.

1-month ATM USD/JPY down slightly to 11.65%/12.35% from 11.75%/12.45% Tuesday in New York, as relatively calm spot, ahead of partial U.S. market closure for Veterans Day, reinforces view underlying exchange rate fluctuations to be limited into end of month, with U.S. Thanksgiving holiday on Nov. 26, option dealers say. But in sign vols could rise slightly in coming sessions on view spot fluctuations to pick up next month, one player buys 1-month ATM USD/JPY straddle at 12.20%, face value of $75.0 million, says senior manager at major non-Japanese brokerage. Says if such buying interest strengthens in next few days, as players look to bargain hunt options at current low levels, benchmark vols may rise to around 13.00% later in week.

Broad-based USD weakness continues in Asia, as recent USD selling trend reinforced after U.S. Treasury Secretary Geithner offered nothing more than lip-service support for U.S. strong USD policy in meeting late yesterday in Tokyo with Japan Finance Minister Fujii, says Daisuke Karakama, economist in forex division at Mizuho Corporate Bank. USD Index marks a fresh low since August 8, 2008 at 74.889. Says backdrop to USD weakness "remains the preference to channel assets away from the low-yielding dollar, since expectations are for U.S. rates to stay low for quite some time, and into higher yielding assets," to benefit of EUR, commodities such as crude oil. Adds "few people believe the U.S. strong dollar talk anymore, and actually there is a view within the U.S. that a weaker dollar is preferable as it helps in certain aspects of the U.S. recovery," such as in boosting competitiveness of U.S. exports.

EUR/JPY jumps nearly 30 sen after raft of China October economic data, as "figures were a bit on the strong side," bolstering risk appetite to benefit of higher-yielding, riskier EUR, says Hiroshi Maeba, senior FX dealer at Nomura Securities. But cross now falling back on short-term profit taking, with ceiling looking thick around 135.00 vs last 134.37, says Maeba. Commodity-linked AUD, which tends to rise on positive signs from key Australia trading partner China, also jumped on data, but AUD/JPY resistance tipped at 84.00 vs last 83.41.