Gain Capital

G7 update 11:30 ET Sunday April, 13: The G7 revised its statement on currencies, expressing a note of concern over additional recent declines in the USD since February, but stopped short of signaling that coordinated action is imminent. The relevant comment is as follows: "Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability." The G7 last met Feb. 9 in Tokyo; at that time EUR/USD was at roughly 1.4500 and USD/JPY was at 107.30. While not mentioning any currencies specifically, the G7 statement is implicitly directed at the weakness of the USD. The change to the statement is somewhat of a surprise and represents an escalation in consensus thinking that the USD has weakened too far, too fast, specifically referring to declines since early February. More importantly, the statement contains an implicit warning that the G7 is watching the USD’s slide and is more likely to become engaged should further USD declines threaten to become destabilizing on their own. At the same time, based on officials’ comments around the G7 meeting, the group still does not appear to be preparing for imminent coordinated action on currencies, undercutting the statement’s impact. US Tsy. Sec. Paulson, for example, said “All I’m going to say is that if you never changed the communiqué language no matter what happened around the world, it would be pretty meaningless. This communiqué reflects market developments and changes in the markets.”

In the very short-run, the initial impact will be USD positive, potentially resulting in a 50-100 pip gap higher for the USD between Friday’s closing levels and Sunday/Monday opening prices against other major currencies. Additionally, USD short-positioning is likely to be reduced, adding to USD upside potential over the next several days, but near-term fundamentals should limit the extent of the USD rebound. The basis for USD weakness is compelling and is likely to be reinforced as incoming economic data points to greater near-term slowing. Looking farther out, however, the easy path of selling USD’s as new lows are made will be increasingly difficult. The G7 statement has introduced an element of uncertainty into currency movements and USD-sellers will now have second thoughts about pushing the USD downside too aggressively. This suggests profit-taking on USD declines will become more pronounced on an intra-day basis, very likely increasing near-term volatility. For example, if US data comes in weak and the USD is sold as a result, short-term traders will be more intent on booking profits rather than letting positions run, likely leading to plenty of short-term rebounds for the USD. In concrete terms, key levels to watch to gauge the extent of the USD rebound are 103.00/25 resistance in USD/JPY (above sees potential back to 105.00 initially) and 1.5550/1.5600 support in EUR/USD (below sees potential back to 1.51/5200 initially). In particular for EUR/USD, I would point out a bearish divergence between daily momentum in EUR/USD and recent strength as well as a ‘triple top’ at 1.5900, both suggesting a significant multi-week high has been seen in the pair.