DAILY FOREX:
EUR USD (1.5025) Jean-Claude Trichet was again on the wire
yesterday talking about excess currency volatility. This is laughable, of
course, as the one-month implied is sitting at the year low. So
observers conclude that he must be referring to the absolute level of
the euro-dollar. But this view might also be flawed. The ECB cannot
deny there are some advantages to a strong euro with crude oil again
trading at $80. Nor do eurozone exporters see the currency’s strength
as their main problem. Trichet could indeed be worried about volatility:
not the variance of the FX rate, but the variance of the gap between
that rate and the imbalance. With the eurozone there is almost no
imbalance but some exchange rate volatility; in contrast, with China,
there is a huge imbalance but almost no exchange rate volatility. For
Trichet, the solution is verbal intervention. For other countries, real
intervention has been used or threatened, investment taxes have been
imposed, and an exchange rate ‘freeze’ mooted. In every case,
appeals to the US to do something to stabilise the dollar have
apparently fallen on deaf ears. The question here is whatever
happened to the G20? Wasn’t the purpose of the wider group to
prevent precisely the situation where every nation goes away and
does its own thing? Is the G20 already redundant?
We maintain our euro-bullish strategy. However, we are not convinced
that reliable supply will be found nearby. As a result we shift the
upside objective higher to 1.5260. The downside risk-limit must also
be tightened to 1.4900.