KBC Market Research Desk
KBC Bank
On Monday, trading in the major currency cross rates developed along the same lines as it did of late. Market anticipation on further ECB easing kept the euro under modest pressure. EUR/USD set a minor correction low below 1.0566. USD/JPY profited from a constructive risk sentiment and a slight rise in core bond yields. EUR/USD closed the session at 1.0565 (from 1.0593 on Friday). USD/JPY closed the session at 123.11 (from 122.80).
This morning, Asian equities markets turned into risk-on modus even as regional are data mixed. The Chinese manufacturing PMI’s remained weak, holding below the 50 boom-or bust level. The non-services measure improved to 53.6.
Chinese equities underperformed early in the session, but are catching up since. The yuan is little changed at 6.3980/85 after the IMF allowed the Chinese currency to the SDR basket. Japanese capex data were much stronger than expected at 11.2% Y/Y. This suggests an upward revision of the Q3 GDP.
USD/JPY lost some ground, but it was due to a small dip in the dollar rather than yen strength. Even so, the losses in USD/JPY are contained as equities perform well. USD/JPY trades currently in the 122.95 area. The Reserve bank of Australia, as expected, kept its policy rate unchanged at 2%. The statement maintained a neutral tone. Earlier this morning, the Aussie dollar rebounded to the 0.7280/85 area on strong trade data (positive contribution to GDP). Commodities are also in better shape. Remarkably, the risk-on sentiment this time doesn’t help the dollar. EUR/USD is off yesterday’s lows. The pair is trending higher high. The 1.06 barrier is coming with reach.
Today, the final EMU manufacturing PMI will be published, but no market reaction is expected. In the US, the manufacturing ISM has more market moving potential. A modest rebound from 50.1 to 50.5 is expected, but we see downside risks to the consensus. The ISM release shouldn’t affect the Fed policy intentions (Dec lift-off). However, some limited USD profit taking is possible if it would drop below the 50 mark.
(Currency) markets show some ambiguous signals this morning. Sentiment on risk is constructive, but the dollar is drifting slightly off the recent highs.
The ‘rebound‘ in commodities might be slightly negative for the dollar (cf. rebound of gold). So, the dollar might be ripe from some consolidation/profit taking after the recent rally and given rather mediocre US data of late. Even so, we don’t expect a big U-turn, especially not in in EUR/USD ahead of the ECB policy decision. Euro caution will remain also in place due to expected ECB easing.
From a technical point of view, EUR/USD dropped below the 1.0809 support and reached the targets of the short-term multiple top formation in the low 1.0715 area. With policy divergence between the Fed and the ECB still in place, we don’t row against the EUR/USD downtrend, but 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 came on the radar, but a test looks difficult short-term.
Cable testing the 1.50 barrier
On Monday, the global USD trends drove sterling trading. The UK lending data were close to expectations and had no lasting impact on sterling trading. USD strength was the key factor. Cable dropped briefly below the 1.50 barrier, but the break could not be sustained, as the dollar rally eased during the US trading session. Cable closed the session at 1.5056, even slightly higher from Friday’s close at 1.5036. EUR/GBP initially hovered sideways in the mid-0.70 area, but lost some ground as cable rebounded after the rejected test of the 1.50 barrier. EUR/GBP closed the day at 0.7018 (from 0.7046).
Today, markets will look for the UK manufacturing PMI. A setback from 55.5 to 53.6 in November is expected after last month’s surprise rebound. We see downside risks to the consensus. The BoE will also publish the results of the stress tests and the financial stability assessment. BoE’s Carney will give a press conference. The financial stability report won’t be of major importance for sterling trading. A poor PMI might be slightly negative for sterling. On the other hand, we look out whether the 1.50 support holds in cable.
Looking at the broader picture, the soft ECB stance pushed EUR/GBP lower in the longstanding sideways range. The pair cleared the 0.7196 support after the October FOMC meeting. We maintain a sell‐on‐upticks approach for EUR/GBP as euro weakness prevails. Next key support is this year’s low at 0.6936. The correction low at 0.6982 has become an interim support.
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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