KBC Market Research Desk
KBC Bank
On Tuesday, the equity rally slowed and so did the US dollar momentum. EUR/USD initially held close to the 1.12 barrier. USD/JPY hovered mostly in the lower half of the 120 big figure. The US trade deficit widened sharply but was ignored. Later in the session, the dollar lost some ground, especially against the euro. The move coincided with a rebound of several commodities including oil. Long term interest rate differentials between the US and Europe moved also in favour of the euro. EUR/USD closed the session at 1.1272 from 1.1188. The swings in USD/JPY were much more limited. The pair ended the session at 120.23 down from 120.46 on Monday.
Overnight, Asian equities continue the gradual uptrend, even as US equities fell prey to profit taking yesterday. The rise of oil and other commodities is supporting emerging markets’ equities. The Nikkei initially underperformed as the BOJ left its policy unchanged, but caught up later on. USD/JPY dropped temporary from the 120.30 area to the 119.75/80 area, but trades again in the 120.00 area. China’s foreign exchange reserves declined by $ 43.3 bln in September. It mirrors the PBOC interventions to stabilize the yuan as uncertainty rose in the wake of a surprise yuan devaluation in August. EUR/USD filled offers in the 1.1280 area this morning., but trades slightly lower currently (1.1260). The rise in commodities apparently weighs on the dollar, including on USD/EUR.
Today, there are only second tier eco data on the calendar in Europe and in the US. So, global sentiment on risk and maybe also the performance of commodities will set the tone for USD trading. Yesterday, the USD rally ran into resistance even as sentiment on equities stayed rather constructive. We also keep an eye at commodities including the likes of oil and gold. Of late, the link between commodities and the dollar wasn’t that tight. However, we look out whether the inverse correlation between commodities and the dollar will be restored. The jury is still out, but we have the impression that commodity developments might make the topside in the dollar more difficult short-term. In a day-to-day perspective, we maintain the view that the short-term rebound of the dollar is running into resistance. The 1.1087 support is a tough support. 1.1319 marks the post-payrolls high and is a first intermediate resistance. 1.1460 is key medium term. A test of that level might be on the cards.
In a long term perspective, EUR/USD and USD/JPY might see more range trading. A Fed rate hike will be delayed, but such a scenario also raises the chances for more ECB or BOJ easing. In this context, both EUR/USD and USD/JPY might still hold the recent ranges. From technical point of view, EUR/USD is holding the established sideways consolidation pattern The dollar rebound ran into resistance just north of the EUR/USD 1.1087 support.
1.1087/1.1017 is a solid bottom. 1.1460 is a first interim resistance. 1.1714 is the line in the sand. If the policy divergence between the Fed and the ECB would become still less obvious, EUR/USD may return toward the topside of this range.
Cable rebounds
On Tuesday, there was no eco data with market moving potential on the agenda in the UK. At the same time, the price action in the dollar and/or the euro initially didn’t give any clear guidance for sterling trading. Later in the session, cable followed a late session decline of the dollar. Cable closed the session at 1.5227 (from 1.5146 on Monday). In this dollar decline, EUR/USD and cable moved largely in lockstep. EUR/GBP closed the session at 0.7404 (from 0.7387).
Overnight, BRC shop prices dropped -1.9% Y/Y (from -1.4% Y/Y in August). The report had no negative impact on sterling. Sterling is even gaining slightly ground against the euro and the dollar this morning? Later today, the UK production data and the NIESR GDP estimate will be published. August production is expected to rebound after a very poor July figure. Recent UK data from the production sector often surprised on the downside. So, we don’t expect a big positive impact on sterling. We also look at the speech of UK PM Cameron on EU membership. From a technical point of view, EUR/GBP is still trading in the upper part of the trading range which is marked by the 0.7423/0.7483 boundaries. The 0.7423 was extensively tested, but no sustain break occurred. Trading north of 0.7483 would deteriorate the sterling short-term technical picture, which is not our preferred scenario. Even so, partial stop-loss protection on EUR/GBP shorts can still be considered.
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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