Divyang Shah (Global Strategist)
FX Summary.
Within the 0.83-0.87 trading range expect a lot of volatility. Residual carry trade related selling is still rumoured to be capping the upside and unless these are disposed of expect USD/JPY upside to be a little heavy.
US Q2 earnings announcements, Hayami (Tues), Greenspan (Wed), ECB meeting (Thrs) and G8 summit (Fri). A busy schedule holds the potential for increased market volatility but the market doesn't see this sufficient to force EUR/USD or USD/JPY out of recent ranges. While we continue to believe that the dollar will derive much strength from safe haven bids this has been tempered by concerns over the strong dollar. There continues to be concern that G7 policy makers are engaging in an exercise of talking down the dollar in the hope that it does not appreciate further. Continued dollar strength is seen as a problem for global growth as it (1) prevents the European's from cutting interest rates and thus playing a co-operative role in stimulating global growth and (2) adding pressure to the Argentine peg. The key is that policy makers do not favour a reversal in dollar strength as this would only add yet more pressure to the global financial system. With dollar strength seen contained and no real reason to buy the EUR aggressively the bias has once again shifted towards range trading on EUR/USD. Within the 0.83-0.87 trading range expect a lot of volatility. There is a lot more conviction over JPY weakness with recent unwinding of JPY carry trades not seeing a loss of enthusiasm for testing USD/JPY upside. IMM data reveals that net shorts from the spec community has gone down to 24,090 from 32,380. Residual carry trade related selling is still rumoured to be capping the upside and unless these are disposed of expect USD/JPY upside to be a little heavy. The G8 summit will be focused on to see how much JPY weakness is likely to be tolerated at a time when emerging markets (including Asia) are feeling the heating from global growth slowdown.

For further information contact Divyang Shah.
+44 207 664 0266
dshah@ideaglobal.com