FXCM: Yen Recovers; Euro Marks Time



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FXCM: Yen Recovers; Euro Marks Time

20.09.2006 12:28 Wednesday

The coup in Thailand proved to be a short tern risk to yen bulls as the currency rallied in Asian session after Thai military leaders assured the world that the takeover of government was temporary and new elections would be scheduled for November. While that date may be optimistic, the currency markets generally viewed the situation in Thailand as long term positive development that could bring about much needed reforms of what many considered to be a politically corrupt regime.  Should the transition of power in Thailand proceed smoothly any further impact on the yen will be minimal. However, if violence erupts as a result of the coup – especially if the loyalists to the ousted Prime Minister Thaksin Shinawatra attempt to stage a counter strike,  yen – as the dominant currency of the region - may weaken once again as speculators step away from this geo-political risk. With no major Japanese economic news on the calendar until next week, the developments in Thailand may well be the story that drive trade in USD/JPY for the rest of the week.  

In UK today, little surprise from the MPC as the committee revealed that the September vote to keep rates steady was a unanimous 8-0. The UK central bankers are still trying to asses the extent of inflationary pressures in the UK economy and as of now odds of yet another 25bp hike before year end appear to be 50%-50%. UK consumption and wage growth will be the two critical data points for the bank to consider in the next month. With housing prices enjoying a rebound and wage growth steady the UK consumer appears to be in relatively good health ahead of the critical Christmas season. Nevertheless, high debt levels and slowdown in  US growth which may dampen both UK export demand and further growth in its booming finance sector, could all serve to contain any inflationary impulses and keep the BOE on the sidelines for the rest of the year.  Little wonder then that the EUR/GBP cross saw no material reaction from the news.

In US the market expects no change from the FOMC meeting at 14:15 GMT today with the Fed keeping rates at 5.25%.  As always traders will scrutinize the  language of the release most specifically for any reference to the rapidly decelerating housing market. If the Fed expresses concern over the recent weakness then the greenback may be in for additional selling. However, if the Fed shrugs off the impact of housing on overall growth and in fact emphasizes the positive ramifications of sharply lower oil prices, traders could push the dollar higher on assumption that additional rate hikes before the end of the year may not be totally out of the question. 

Boris Schlossberg, Senior Currency Strategist