7 November 2001, 17:29 NY FX: NY Traders Surprised By Euro Rally On Squaring /ECB Cut
New York traders were surprised by the overnight move seen in the euro. When they left Tuesday, the euro was well offered, when they walked in Wednesday - it was well bid.
The euro-dollar was trading at $0.9003 at 8:59 a.m. EST, up from
Tuesday's close of $0.8950.
Traders said the part of the euro's move higher was position
squaring. Many players had gone into Tuesday's Federal Reserve Bank
meeting short euros/long dollars hoping for the dollar to rally once the
50 basis point rate cut was announced.
Instead, it was well priced into the market and any dollar rally
began to sputter during the Asian session.
The euro hit lows near $0.8940, where a Hong Kong name was seen
buying. Traders said there was talk that this was linked to an Asian
central bank adjusting their reserves in favour of the euro and
sterling.
The euro then rallied up through $0.9000 offers and stops to trade
at highs near $0.9047 during the European session.
European traders said the final lift in the euro was due to renewed
hopes of a 50 basis point cut by the European Central Bank (ECB) at
their policy setting meeting on Thursday.
Many traders think the market is getting way ahead of themselves in
thinking the ECB would even think of lowering rates by more than the
usual 25 basis points.
"The ECB ... I still see only doing 25 basis points, despite the
reports in today's Handelsblatt," said one London trader.
The German daily, Handelsblatt, said in an article Wednesday, that
the news of the Fed's 50 basis point rate cut raised hopes that the ECB
would embrace a similarly aggressive move.
Remarks by ECB Governing Council member and Bundesbank President
Ernst Welteke in a speech in Frankfurt Tuesday may quell some of the
market's optimism.
He said he was cautiously optimistic about the prospects for a
near-term recovery in the eurozone economy, but noted the full effects
of the ECB's rate cuts this year have not yet been felt.
Welteke again played down the ability of either monetary or fiscal
policy to fine-tune the business cycle. "Monetary and fiscal policy -
however perfect they may be - cannot prevent the ups and downs of the
economic cycle."
This lack of reaction to the ECB cuts is due in large part to the
markets' increased risk aversion after the September 11 terrorist
attacks, according to Welteke.
As time passes and the markets regain confidence, the risk spread
will diminish, improving financing conditions, he said.
Despite the euro-dollar's rally on the day, few traders have
changed their long term prognosis for the pair.
They still think the U.S. economy will turn a corner well before
any rebound is seen in Europe and in the bigger picture they prefer to
own dollars.
On the day, euro-dollar offers are seen at $0.9050, $0.9075/80 and
at $0.9100.
There is talk that an Asian Central Bank may have a sell order in
place around the $0.9030 area.
On the downside, bids remain at $0.9000, and at $0.8980.
Additional bids would be found below $0.8950, traders said.
Dollar-yen took inched lower in overnight trade, even with a sharp
decline in the Nikkei, which fell 349 points to close at 10,285.
Dollar-yen was trading at Y121.14 at 8:59 a.m. EST after dipping to
lows near Y120.77 in Asia.
Japanese investor account sold dollar-yen down through the Y121.20
area during the Asia session, sending the pair eventually through
support around Y121.00.
Commodity trading advisors (CTAs) and model driven accounts were
seen selling dollar-yen on the break of Y121.00 in earlier sessions.
Offers in dollar-yen are in place at Y121.15/20.
Bids should be found around Y120.75/80, with stop-loss dollar-yen
sell orders seen below Y120.70.
Additional bids are found at Y120.50.
In the U.S. on Wednesday, there is little in the way of data other
than Sept. Consumer Credit, due out at 3:00 p.m. EST.
The median estimate in a Market News International survey of
economists is for a -$1.0 billion in September, vs +2.3 billion in
August.
Otherwise currency pairs will likely take their cure from U.S.
equity markets, said traders.
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