Market Rumours

EUR/GBP selling continues to be the main FX story Wednesday, with the cross printing a fresh one week low of 0.9037 and pushing GBP/USD within a whisker of 1.67. One London bank trader is hearing a UK clearer has sold over EUR/GBP 2 Billion so far this session

USD/JPY has unwound last week's extreme momentum readings, and is no longer oversold on the daily charts, says Barclays Capital. This doesn't mean the downtrend is poised to resume, more likely a period of range trading under 88.25 ensues. However, BarCap says ultimately such price action will result in a retest of recent lows before year end. USD/JPY now at 87.26, from last Friday's 14-year low of 84.82.

GBP/USD looks bid Wednesday and a move above 1.6650 will likely see stops triggered toward the next major resistance area around 1.6720. GBP/USD now trades at 1.6634, the recent high was seen Monday at 1.6646.

Keep on selling USD/JPY with a target of 85-85.80, says UniCredit. The bank reckons that despite the Bank of Japan's failure to act decisively so far, investors are "keen to find out where the BOJ will draw its line in the sand for intervention." The pair is now at 87.17.

If Japan buckles under the pressure to devalue the yen, it could be open season for a global round of currency interventions. Such a move became much more likely Tuesday, after the country's authorities pumped Y10 trillion ($115 billion) in cheap liquidity into the country's financial system--a surprise move aimed at weakening the currency and tackling deflation. It was, however, a flop, at least in terms of the yen's strength against the dollar. The greenback ticked up by just over 1% against the yen, to hit the day's high at Y87.54. Traders quickly bought the yen back once again, leaving the currency within reach of its highest levels against the dollar since 1995. Many market watchers now think a more straightforward, heavy-hitting currency intervention involving selling yen to buy dollars, is edging closer. That could rumble not only the yen, but a range of currencies all around the world. The reason: if it is OK for Japan, then what is to prevent other countries from stepping up their efforts to stop their currencies from soaring against the sliding dollar? "That's the problem," said Stephen Jen, chief currencies risk taker at hedge fund BlueGold Capital in London. "It would validate intervention, and that's the reason Japan has not done it yet. Japan sees itself as always doing the right thing for the good of the region and the world. But it doesn't have a choice at this point." Japanese intervention is far from certain. For one thing, it's tough to describe the current bout of yen strength as disorderly--a trigger that has been used by authorities around the world for currency intervention in the past. Instead, the yen's climb has been quite gradual. In addition, while the yen didn't weaken much against the dollar Tuesday, it did fall markedly against the euro, sterling and the Australian and New Zealand dollars. Still, if Japan does make intervention less of a dirty word for major economies, it could tempt others in. "It's imaginable that New Zealand could join the party," said Ray Farris, head of foreign-exchange strategy at Credit Suisse in London. "You could maybe also think about Sweden and Norway," he added. Intervention could become a useful tool for any central bank that is keen to raise interest rates but reluctant to generate export-crimping currency strength, Farris said. Like other major nations, Japan has repeatedly signed up to the consensus among the Group of Seven major economies that competitive devaluations are undesirable. Still, it has been tempted of late, because the yen has soared by some 10% since April when measured against a basket of currencies of its major trading partners. Against the dollar, which has slumped against most major currencies, the move is more severe, with the yen climbing by 14% since April to mark a 14-year high. Japan now has two serious problems. One is sinking consumer prices, which fell by 2.2% on the year in October, following a 2.3% decline the month before. Yen strength only adds to the problem by making it ever cheaper for Japan to import foreign goods. The other major concern is investor sentiment. "Foreign investors don't like yen strength," said Simon Derrick, a currencies analyst at The Bank of New York Mellon in London. Flow data at his bank show that "foreign investors have been pulling away from Japan since the start of the year," Derrick said, noting that a strong yen makes life hard for Japanese exporters, the backbone of the economy. "It's all been out, out, out," he added. To some, the BOJ move Tuesday was designed chiefly to lay the groundwork for a full-scale intervention, proving that it has exhausted its monetary policy options. Other, less developed nations have already gone down this route. Most famously, Brazil imposed capital controls in October, seeking to weaken the real against the dollar. Taiwan also toughened rules on foreign investors' deposits in November. Authorities across Asian emerging markets have been intervening for several months. Vietnam shoved its currency--the dong--5% lower last week, while Russia has made no secret of its desire to cool the ruble. China has effectively pegged its currency to the sliding dollar since the middle of last year. "In the early 1990s, it was absolutely accepted that central banks managed their currencies within well-defined ranges," said The Bank of New York's Derrick. "I think we might go back to that kind of world."

Keep an eye on BOJ's balance sheet for a read on USD/JPY, says Nomura strategist Paul Schulte; In past few months, BOJ has unwound commercial paper holdings, cut other market assets to $18 billion from $33 billion; says this "essentially a reverse repo operation, which is resulting in a reduction in currency in circulation...This could lead a reader of balance sheets to conclude that deflation is an intended outcome by the managers of the balance sheet. So, the appreciation of the yen is entirely understandable." Notes several investors at Nomura investment forum in Tokyo said many corporates were pricing in USD/JPY in Y70s, but says news of BOJ's new lending facility yesterday taken by some as "signal Japan will now officially loosen its policy stance." This means yen should weaken in short run and exporters should respond accordingly, Schulte says.

The International Monetary Fund and finance ministers from the 16 countries using the euro believe the single currency is overvalued, the ministers' chairman said on Tuesday. The head of the IMF's European department, Marek Belka, presented a regular report on the euro zone economy to the currency area's finance ministers and European Central Bank President Jean-Claude Trichet."We agreed with him when he said that the euro was overvalued and that some adjustment in that area would be desirable," the Eurogroup's chairman, Jean-Claude Juncker, told a news conference.