KBC Market Research Desk
KBC Bank
On Monday, currency markets initially retuned to the divergence trade with the dollar regaining further ground and the euro returning part of the post-ECB gains. The move was corrective in nature, as there was no high profile news to guide the price action. The decline in oil and other commodities weighed on the likes of the CAD,NZD,AUD end the NOK and supported the US dollar. During the US trading session, the dollar lost part of the earlier gains as the decline of oil triggered substantial losses on the US equity markets. Later on oil continued to decline but the euro stabilized. EUR/USD closed the session at 1.0837 (from 1.0981 on Friday). USD/JPY held up remarkably well and closed the day at 123.37 (from 123.11).
Overnight, Asian equities turned also in risk off modus. Chinese trade data were again weak (especially exports). It keeps several commodities (including oil) near the recent lows. The Japan Q3 GDP was revised higher than expected from -0.8% Q/Q annualised to (+1.0%), avoiding a technical recession. USD/JPY is declining moderately, but most likely on regional risk-off sentiment rather a positive reaction on the Q3 revision. The rout in commodities is weighing on the likes of the kiwi dollar and the Aussie dollar. However, the decline of the AUD (currently 0.7240 area) stays moderate. The global risk-off trade supports the euro slightly more than the dollar. EUR/USD trades in the 1.0850/60 area.
Today, the EMU Q3 GDP revision will be published. The composition of the GDP is interesting, but it won’t affect trading anymore. In the US, the NFIB small business confidence and the JOLTS job openings will provide some valuable information on the US economy, but also here are no strong market movers. The dollar is probably more sensitive to negative than to positive surprises.
Global sentiment on risk (negative) and the developments in the commodity markets will be the key drivers for global (currency) trading. This context is more negative for the dollar than for the euro. The unwinding of carry trades (euro positive) will probably outweigh the theoretically positive effect of declining commodities on the dollar. Even so, as short-term US interest rates hold up well, we expect the upside in EUR/USD to be limited and the post-ECB ranges to hold.
With the ECB deposit rate at -0.3%, the euro will continue to face an impressive interest disadvantage. Interest rate differentials at 2-year between Germany and the US have declined from the 140 area to around 125 currently. This is a substantial adjustment. After last week’s ECB decision, the debate has shifted to the pace of further Fed tightening after next week’s Fed meeting. It might still take some time (and some good US eco data) for the dollar to regain further ground. However, even after last week’s ‘ECB failure’ to meet market expectations, policy divergence has probably still a role to play. Admittedly, it will have to come from USD strength, rather than from euro weakness.
EUR/GBP stabilizes near correction top
On Monday, the UK, US and EMU calendars were devoid of market moving data releases. The ECB decision (on Thursday) propelled the euro higher across the board, but caused a rebound of cable and a rise in EUR/GBP as cable underperformed EUR/USD. Yesterday, sterling tried to regain ground on the euro, but didn’t succeed. Early gains evaporated and the pair closed little changed at 0.7198. Weaker commodities weighted more on the heavily commodity influenced UK equities. So the risk off keeps sterling near the post-ECB lows. Overnight, EUR/GBP went even a bit higher and trades again just north of 0.72. within striking distance of first EUR/GBP resistance at 0.7250.
Yesterday, cable initially dropped lower as EUR/GBP followed EUR/USD down. When the euro rebounded on weak commodities and a decline of equities, sterling still underperformed, pushing cable lower to a close near 1.5050, a decline of Friday’s close at 1.5112. The short term trend in cable remains down, but the pair is still some way of the recent lows at 1.4895. So, sterling sentiment remains fragile. The commodity rout and risk off hit sterling more than dollar or euro.
Today, the UK BRC sales largely underperformed expectations and dropped 0.4% Y/Y in November, following a 0.2% M/M decline in October. Markets expected a 0.5% M/M increase. That’s an additional slightly sterling negative factor. Later today, the Halifax house prices will show buoyancy in the sector (concern for BoE and government), but also weak industrial production is on the agenda (0.1% M/M expected). As the BoE wants to ignore the housing bubble (macro-prudential measures are advised), we are afraid that sterling won’t find support in the data. Only a turnaround of commodities and equities may avoid a retest of recent lows. At this stage it is too early to bet on a scenario of the BoE becoming more hawkish, limiting the comeback room for sterling. Today, we expect technically inspired trading near the 0.7250 resistance area.
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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