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Foreign Exchange

FX research roundup: Happy Birthday, Plaza Accord

This week we note the contrast between the multi-lateral intervention of 25 years ago and the unilateral approach and competitive currency weakening of today. Also, in the spotlight this week, are EUR/USD, USD/JPY, the India foreign investment cap increase and predictable EUR/GBP rumours.

Wednesday marked the 25th anniversary of the Plaza Accord whereby the governments of the US, UK, West Germany, Japan and France agreed on multi-lateral intervention to weaken the dollar – I don’t know why I mention that except to highlight that the world has changed and that today’s scenario is one of unilateral intervention and competitive currency weakening. And that the post-Plaza 50% weakening of the USD against the yen was down to rhetoric, fear, and intervention to the value of a mere $10 billion – it was a smaller market back then.


Back to the present. The 50% retracement of the 1.5141 to 1.1875 move in EUR/USD comes in at around 1.3510 so it is little surprise that most technical studies are now calling for this as the next objective. But the more fundamental analysts appear a little less confident of the upside.


On Monday, Simon Derrick at BNY/Mellon opined that “buying the EUR...seems dangerously close to the “greater fool theory” of investing (buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price). More simply, buying the EUR simply because of market dynamics sounds a dangerous idea.” Like most commentators Derrick saw the FOMC statement as heralding a further bout of quantitative easing and therefore USD-negative and EUR/USD got as high as 1.3440 on Wednesday but as the week wore on analysts had a rethink.


Prime among them was widely followed Fed-watcher Steve Beckner at MNI saying that the market had got ahead of itself: “The FOMC policy statement was widely seen as the next inexorable step down the road toward a resumption of quantitative easing.


In fact, there is no inevitability...The FOMC statement is highly conditional, as indeed Bernanke’s Jackson Hole comments were,” and the dollar selling abated a little.


Citi’s G10 FX strategist Todd Elmer sees QE1 as being a guide noting that around the initial announcement of Fed Treasury purchases in March 2009 the dollar declined in the run-up to that Fed meeting, dropped sharply on the announcement, but stabilized within two days to trade higher over the next month. However Elmer reckons that USD weakness could soon “reassert itself so we believe that a further dip from EURUSD would represent a buying opportunity.”


But Lee Hardman at Bank of Tokyo-Mitsubishi UFJ is in the EUR/USD bear camp, saying that “euro strength [is] running on borrowed time” believing that “the euro’s anti-dollar status is no longer as compelling, diminished by both the ECB’s recent decision to begin purchasing peripheral government bonds and also the weakening of its collateral standards”. Hardman sees “EUR/USD in the mid to high 1.30’s likely to prove very attractive medium-term sell levels.”

But it’s not all about EUR/USD of course. And following last week’s intervention, USD/JPY is very much to the forefront. More intervention is envisaged now that the price has settled back to the mid-84s: it is not often that you see USD/JPY vols as yen puts over but that is precisely what the short-end is this morning. The spike up overnight to 85.20 is of course being attributed to intervention but given there has been no official confirmation and could be down purely to market nervousness.


On Thursday the Indian government announced that the cap on foreign investment in government and corporate bonds was increased from $5 billion and $15billion to $10 billion and $20 billion. The INR is of course better bid but it seems a bit muted at the moment – maybe it will be a slow mover as the increased bond purchases hit the market.


I refrained from mentioning 1-week EUR/GBP options in this week’s piece about the single farm payments but there were rumours around that a clearer was in buying .8400 puts. No sign of it according to anyone I speak to in the options market. It is probably just another extrapolation of the “if I had the order I’d...” conversation.

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