KBC Market Research Desk
KBC Bank
Risk-off sentiment causing modest USD correction
On Thursday, global markets gradually turned into risk off modus. A new downleg in commodities weighed on global equities. Initially there was no clear directional reaction of the dollar. The US currency opened slightly in the defensive in Asia. Euro weakness resurfaced as ECB’s Draghi kept a soft stance in a hearing before the European parliament. Later in the session, further equity losses took some shine off the dollar. EUR/USD closed the session at 1.0814, from 1.0743. USD/JPY ended the day at 122.61 (from 121.86).
Overnight, Asian equities are also affected by the correction in Europe and in the US. The decline in commodities continues. The Aussie dollar holds up well (AUD/USD at around 0.7125) despite the commodity decline. Yesterday evening and overnight, several Fed-members gave their view on the economy and on monetary policy. Most of them confirmed that a lift-off can be considered in the near future. Stanley Fisher elaborated on the weak global context and on the impact of the stronger dollar on growth and inflation. However, for now those factors are apparently no objection for a December lift-off. Even so, the dollar remains slightly in the defensive. EUR/USD jumped temporary above 1.08 yesterday evening and trades currently in the 1.0785 area. USD/JPY is holding below the 123 barrier and trades currently in the 122.65 area.
Later today, the calendar is very interesting. In Europe, the first estimate of the Q3 EMU GDP will be published. Growth is expected at 0.4% Q/Q (similar to Q2) and at 1.7% Y/Y. An EMU growth figure in line with expectations wouldn’t be a grand cru, but isn’t that bad either. However, recent ECB comments suggest that this kind of growth won’t change the bank’s intention the ease policy further.
So, we probably need a substantial upward surprise for EMU growth to support the euro in a sustainable way. In the US, the retail sales, the PPI and the consumer confidence of the University of Michigan will be published. October retail sales are expected to rebound (0.4% for the control group) after a poor September figure. We don’t have strong reasons to take a different view from the consensus. Michigan consumer confidence is expected to improve from 90.0 to 91.5. We see risk for a better than expected report. PPI data are expected to stay soft. The combined activity data (retail sales and consumer confidence) might be slightly positive for the dollar.
Short-term, the ‘confirming’ of a December lift-off helps to put a floor for a USD correction. Equities and commodities became more important as a factor for global and for currency trading. For now, the growing risk-off sentiment is blocking further dollar gains, but the losses remain most. The decline in commodities is hardly any help for the dollar. We don’t expect an EUR/USD rebound to go far, unless the US data are really poor
In a broader perspective, short term interest rate differentials widened in favour of the dollar. EUR/USD dropped below the 1.0809 support and reached the targets of the multiple top formation (neckline 1.1087/1.1105) in the low 1.0715 rea. With policy divergence between the Fed and the ECB still in place, we don’t row against the USD uptrend. However, quite some news (interest rate) is already discounted.
So, the pace of the USD rally may slow. The post ECB QE lows in EUR/USD (1.0521/1.0458 area) are obvious targets on the charts. We maintain a EUR/USD sell-on upticks strategy for a retest of the cycle lows. For USD/JPY, the cycle tops in the 125.28/86 area come on the radar, but a (sustained) break won’t be easy short-term.
Sterling still driven by global factors
On Thursday, the RICS House Price balance was stronger than expected, but the report was not able to help sterling. There were no other important eco data in the UK yesterday. Cable initially settled in a tight range close to/slightly below the 1.52 big figure, but US weakness pushed the pair back north of 1.52. EUR/GBP to a large extend followed again the price pattern of EUR/USD. The pair spiked lower to the 0.7040 area during the hearing of ECB’s Draghi before the European Parliament.
However as was the case for EUR/USD, there were no follow-through losses. The pair settled in a tight range near the 0.7060 pivot, just to return higher as EUR/USD rebounded after US equity open. The pair closed the session at 0.7099, compared to 0.7062 on Wednesday.
Today, the UK calendar only contains the September construction output. A rebound (1.5% M/M) is expected after a poor August figure (-4.3% M/M). We don’t expected a lasting impact on sterling trading. With global market volatility rising, cable and EUR/GBP are in the first place driven by the global USD moves. In line with EUR/USD, we look out where the rebound in EUR/GBP stops. The 0.72 area should be a strong resistance.
Looking at the broader picture, the soft stance of the ECB pushed EUR/GBP again lower in the longstanding sideways range. The pair tested the 0.7196 support and the level was ‘really’ broken after the FOMC announcement. A retest occurred after a soft BoE inflation report, but the test was rejected. We maintain a sell-on-upticks approach for EUR/GBP.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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