KBC Market Research Desk
KBC Bank
On Wednesday, risk sentiment stayed outright risk-off, but the impact on the major currency cross rates was less pronounced than earlier this week.
USD/JPY touched an intraday low in the 118.25 area, but stabilized later in the session even as US equities were hit by a new late session downleg. The pair closed the day at 118.47 (from 119.06 on Tuesday). EUR/USD showed tentative signs of a bottoming out process as the global risk-off trade continued. The European (services PMI) and US (ADP report and trade balance, non-manufacturing ISM) eco data were mostly constructive but without impact on FX trading. The Minutes of the December FOMC meeting were rather soft. Almost all members agreed that the conditions for the lift-off were met. However some members saw considerable risks to inflation, with the dollar being one of them. The dollar lost further ground against the euro after the publication of the minutes. EUR/USD closed the session at 1.0781 (from 1.0741). So it looks that the ‘risk-off rally’ of the dollar against the euro has run its course.
This morning, the scenario on Asian markets is little different from earlier this week. The sell-off of Chinese equities even intensified as the PBOC set the fixing of the yuan 0.51% lower. USD/CNY trades currently in the 6.5930 area. The off-shore yuan initially reached its lowest level since September 2010, but rebounded later on suspected PBOC intervention. Mainland China equity indices reached the 7% limit, triggering a trading halt. The losses elsewhere in Asia are less pronounced but still substantial around 1% to 2%+. Oil is again hit hard and commodity currencies are under pressure, too. USD/CAD reached a multi-year top north of 1.41. AUD/USD dropped to the 0.7050 area. Contrary to what was the case of late, the risk-off trade sends USD lower both against the yen and the euro. USD/JPY extends its decline. The pair dropped temporary below 118. EUR/USD trades in the 1.0820 area
Today, there are several European eco data (EC confidence indicators, EMU retail sales and unemployment, retail PMI’s). However, these data have usually only a limited impact on currency trading. In the US the challenger lay-offs and the jobless claims will be published. The data are interesting, but we doubt they will have a lasting impact on the USD just one day before the publication of the payrolls and with the market focus on global tensions.
It looks that sentiment will remain riskoff today as uncertainty on China continues to spook global markets. This context is negative for USD/JPY. The losses of USD/JPY this morning are substantial but could have been even bigger given the intense Chinese sell-off. Still, there is no reason to row against the tide unless risk sentiment improves. Over the previous days we were puzzled on the decline of EUR/USD even as sentiment was risk-off. Recently, the risk-off sentiment didn’t really narrow the US-German rate differentials, which was maybe part of the explanation for the USD resilience against the euro. However, spreads might narrow and interest rate support for the dollar decline if the risk-off trade persists. Markets might scale back Fed rate hike expectations. The US 2-yr yield already dropped back below the 1.0% mark. Earlier this week, we advocated not to jump on the EUR/USD decline even as the technical picture turned negative after the break below 1.08. We hold on to that view as we see rising chances for a EUR/USD rebound if the risk-off context persists. As we keep a moderately positive USD bias longer term, we will reconsider to sell EUR/USD higher in the recent trading range (e.g closer to the 1.10/1.11 area).
From a technical point of view, EUR/USD failed to regain important resistance (previous range bottom/break down at 1.1087 and the 62% retracement from the October high at 1.1124) after the December ECB policy meeting and it will be tough to break. Earlier this week, EUR/USD dropped below 1.0796 (07 Dec low), which deteriorated the short-term picture in this cross rate. However, it looks that this attempt might be rejected. Next support is at 1.0650 (76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.1004 (reaction top) is a first important reference. The picture for USD/JPY remains negative below 120. The 118.07 level (15 Oct low) is currently under test. Next support comes in at 116.18 (August low).
Cable extends downtrend. GBP/EUR rebounds
On Wednesday, sterling trading was again primarily driven by global factors. The UK services PMI declined from 55.9 to 55.5; close to expectations (55.6). There was no lasting impact on sterling trading. Early in the session EUR/USD and cable moved largely in lockstep. EUR/GBP initially held a sideways range in the 0.7320/30 area, but rebounded later in the session as the euro performed better across the board. EUR/GBP closed the session at 0.7368 (from 0.7324).
Cable set a new correction low in the 1.4610 area, but didn’t succeed a late session rebound like EUR/USD. The pair closed the session at 1.4630 (from 1.4675).
Today, the Halifax house prices and the UK car registrations will be published. We expect these data to have no lasting impact on sterling trading. Global factors continue to set the tone for sterling trading. Over de previous days, EUR/GBP temporary joined the EUR/USD decline. However, it now looks that the EUR/USD guidance will point north rather than south. A sustained rebound of sterling will be difficult unless there are signs of progress in the Brexit debate or unless risk sentiment improves. EUR/GBP 0.7424 is a first short-term resistance.
Next resistance is stands at 0.7493 (Oct top). A drop below the 0.73 area would call off the ST uptrend, but this looks unlikely short-term after yesterday’s reversal. The technical picture of sterling against the dollar remains fragile. The key GBP/USD 1.4566 2015 low comes within reach.
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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