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Euro currencies hold post-SNB gains, Kiwi stars

TOKYO: The main European currencies made a buoyant start to the week on Monday as the fall out from last week's Swiss rate hike benefited them at the expense of the dollar and the yen.

This concentration on the crosses left dollar/yen out of the limelight for once. It was idling in the middle of its recent 106.20/107.80 yen range with dealers reporting widespread indecision on where to go next.

Instead, the big mover of the morning was the New Zealand dollar, which bounded ahead after gross domestic product (GDP) data showed growth surged 2.2 percent in the fourth quarter to give a heady annual rate of 5.8 percent.

That left an astounded market looking for higher interest rates and saw the Kiwi dollar shoot to $0.4953/60 from $0.4884/91 on Friday. Dealers noted key chart resistance was only a heartbeat ahead at $0.4965 and a break there could open the way to $0.5050. On the majors, some looked for impetus from Monday's meeting of OPEC ministers on the view that any impact on the price of oil would have ramifications for the US inflation outlook, and therefore Wall Street.

Others noted speculation that the European Central Bank might follow the Swiss example and hike at its policy meeting on Thursday, though few truly thought it likely. Dealers noted the comments coming from the bank showed no such sense of urgency.

The latest came from Bundesbank President Ernst Welteke at the weekend. He said there was no current reason to discuss further interest rate hikes, although he added that that could change quickly if inflationary pressure lasts. And yet others had a slightly longer horizon, preferring to focus on next week's release of the Bank of Japan's Tankan survey in the belief it would determine offshore thinking on Japan's recovery and thus set the course for the yen.

"It's a real mixed bag," said a US bank dealer.

"The Swissy's still the play of the moment. We believe there's a lot more carry trades to unwind, though it's yet to be seen if hedge funds will pile into the yen instead."

The Swiss franc CHF was changing hands at 1.6237 per dollar having climbed to a near six-month high of 1.6220 in New York on Friday from around 1.6700 ahead of the SNB's aggressive hike. It was also up at 65.75 yen compared to 63.90 before the tightening.

Dealers noted the dollar had now breached the floor of a five-month-old bull channel at 1.6300, a bearish event that heralded a fall to at least 1.6150.

The euro shared in the franc's fortunes, to stand at 104.40 yen from 102.80 pre-hike, and at $0.9767 to the dollar from around $0.9620.

The dollar in contrast was range bound at 106.93 yen from 106.84 in New York on Friday, well short of the 107.80 peak hit on Thursday.

Traders said Japanese exporters still had selling to do on both dollar/yen at 107.00/10 and euro/yen around 104.50, and that looked like blocking the upside for now.

Further out, the focus was on further unwinding of Swiss franc carry trades where investors borrow in one currency to invest at higher returns in another.

A first hint of the process came on Friday when Treasuries broke a nine-day winning streak, leading dealers to suspect hedge funds were selling bonds to pay back franc loans.

Now they were waiting to see if funds increased their appetite for yen as a low cost borrowing vehicle, an outcome that would tend to depress the currency as the money would flow offshore.

"The fundamentals seem to favour such an outcome," said a dealer at a European bank. "Japan has very low rates and the Finance Ministry is committed to stopping the yen from rising too much, which lessens the forex risk."-Reuters