Market Rumours

The short-term trend for EUR/GBP is up, with recent sideways trading merely helping momentum unwind from overbought, says Barclays Capital. Consolidation above 0.8950 is bullish and the bank says it has targets of 0.9150 and 0.9230, with a buy-dips strategy favored. EUR/GBP now at 0.9040.

While GBP/USD remains capped below 1.52 the outlook remains bearish, says Barclays Capital. Now at 1.5028, the bank looks for slippage below 1.50 to target 1.4850 where some stability may be seen. GBP/USD now at 1.5035.

London traders are hearing talk that this weekend's press will be very negative on both the UK and sterling's outlook, no matter who wins the Election. Sterling is slipping Friday, trading softer on the crosses and against the dollar, currently at $1.5030.

Downside surprises are likely in February's payrolls report says Credit Suisse with the bank's analysts looking for -125K against the -68K consensus. A number in line with this estimate will keep U.S. front-end yields under downward pressure which will have favorable consequences for the JPY says the bank, who favors a tactical USD/JPY short into the numbers. USD/JPY now at 89.23.

The market has been reluctant to short the USD pretty much all week, and neither a good nor bad payroll number is likely to change this outlook, says Lloyds Banking Group. The bank holds the view that buying USD dips vs EUR and GBP makes sense in the current environment. However, following MOF/BOJ initiatives and the bearish seasonal set-up for JPY it favors concentrating on USD/JPY, with a target of 90.65 and 92.00 on a break above. USD/JPY now at 89.28.

Nikkei's story suggesting the BOJ is likely to consider more monetary easing, may not immediately trigger JPY selling, but it should prevent USD/JPY from slipping past its recent lows says RBS. All in all RBS says despite the risk stemming from Japanese year-end repatriation, it sees levels below 90.00 as a buy. USD/JPY now trades at 89.25 from Thursday's 2010 low of 88.14.

Yesterday's drop in JPY 3-month Libors (now below USD's for first time since late Aug) likely to become additional USD positive factor as it makes it a relatively less attractive funding currency for trades into others, Standard Chartered says. Notes Libor switch, together with improved US outlook and worries on liquidity issues elsewhere, may result in significant changes in risk on/off trading environment prevalent over 2009--when equity gains pushed EUR higher, USD lower. "The historically elevated correlation between US equity markets and EUR/USD may ease further in the coming months as investors diversify their choice of funding currencies more widely across USD, GBP, EUR and JPY... The fact that US rates now appear to have found a floor relative to Japan reduces the USD's appeal as a carry funder." EUR/USD last at 1.3590 vs 1.3579 late in NY trade. See "Yen Libor Rate Drops Below Dollar Rate; First Time Since Aug"

Dollar/yen currency options were almost unchanged in Asia Friday, as a firm spot market left players reluctant to buy downside hedges against the U.S. unit. Market participants are now focused on U.S. non-farm payrolls data for February due at 1330 GMT to gauge the health of the world's biggest economy. Options could rise next week if the data come in weaker than expected, dealers said. "Demand for the dollar's downside hedges fell (Friday), but the actual selling amount was relatively small as players remained cautious about the upcoming U.S. jobs data," said an options trader at a major Tokyo bank. The dollar stood at Y89.24 as of 0330 GMT compared with Y89.09 in New York late Thursday. One-month at-the-money implied volatilities stood at 10.95%/11.65% compared with 10.90%/11.60% in New York late Thursday. One player sold 6-month at-the-money straddles, with a $50 million face value at 13.05%, said an options dealer in Tokyo. Such contracts become profitable when exchange rates swing sharply.

USD/JPY may rise above 90.00 in global day if awaited U.S. non-farm payrolls data beat economists' forecast, as markets now somewhat pricing in weak outcomes, says Mizuho Corporate Bank senior dealer Yuichiro Harada. That also means even if the data turn out to be weaker than expected, USD/JPY's downside will be very limited. Chance of upside surprise in today's jobs data relatively high as ADP jobs report released earlier this week stronger than market expectations, he says. Dow Jones poll of economists tip NFP to show jobs have declined by 75,000 in February; data due at 1330 GMT. Pair last 89.24.

1-month ATM USD/JPY implied volatilities almost unchanged at 10.95%/11.65% vs yesterday in NY as firm spot market leaves players reluctant to buy downside protection vs USD/JPY. One market participant sold 6-month ATM straddles, which benefit from greater volatility, with $50 million face value at 13.05%, options dealer in Tokyo says. Players to watch U.S. non-farm payrolls data for February due 1330 GMT; if come in stronger than expected, implied volatilities may fall toward 10.00% next week, options dealers say.

Japan's Finance Minister Naoto Kan's remark that he thinks JPY's rises will be subdued give Asian speculators excuse to sell JPY against USD, EUR, as comment seems to hint at JPY-selling intervention if JPY strengthens too much, though it's far from certain whether Tokyo would actually take such a step barring a sharp JPY rise, dealers say. Also weighing on JPY is Nikkei report that BOJ will likely consider further easing toward April; "the Nikkei report caused some foreign players to cover shorts," says Satoshi Okagawa, head of FX forward trading group at Sumitomo Mitsui Banking Corp. Dealers say those factors may continue to push up USD/JPY to 90.00, EUR/JPY to 121.80, but additional rises may be limited ahead of U.S. February non-farm payrolls data later in day. USD/JPY at 89.32, EUR/JPY at 121.28.

Even if BOJ decides to provide more money to financial firms by expanding fund-provision operation introduced in December as Nikkei reported, room for decline in funding rates of less than 1-year duration may be limited as market has already priced in prolonged BOJ accommodative policy, says UBS chief strategist Eiji Dohke; adds expansion of step may merely be alternative to special lending operation that will expire at end March; in special facility, BOJ has lent 3-month funds at 0.1% with corporate bonds, CP as collateral. Adds increases in JGB outright purchases would be taken after April-June quarter. Recommends to sell JGBs if prices rally sharply to 10-year yield around 1.25%; benchmark 10-year cash JGB yield now down 0.5 bps at 1.320%.