HIGHLIGHTS

  • Bond Markets:
    • US Treasuries gain amid disappointment about post-payrolls lack of follow through selling
    • Front end European yield curve inverts
  • Currencies:     USD nearing key support levels
  • News:     All eyes on US 3-year Note auction

CURRENCIES: USD nearing key support levels

The EUR/USD pair has by now completely re-traced the movement seen last Friday. At that time the USD gained a lot of ground on the back of the stronger than expected US payrolls report.

This permitted the EUR/USD pair to slip form the 1.28 area to the 1.27 area, with dips to the 1.2670 zone at that time. By yesterday evening, this has been erased with the pair even temporary trading above the 1.28 threshold, but a real test of the key 1.2830-area didn’t occur. However, at the end of the day the dollar managed to limit its losses and EUR/USD traded back in the 1.27-area.

The market had no new input to trade on yesterday. It was more a continuation of the recent atmosphere. The USD had lost its positive view already almost two weeks ago now at the Fed meeting. This couldn’t be recaptured by one good release such as the payrolls. Moreover we have made in the past often the remark that the payrolls report risks being a lagging indicator rather than a lead indicator about where the economy is going. The market may be realizing NOT to overestimate it. Some analysts cite jitters concerning the mid term elections in the US. This is not a good reason in our book. It hasn’t been living as a story in the markets up until now and we don’t see why it suddenly should. This morning’s price action at least suggests that the impact of the elections on trading is still very subdued at this stage.

Nevertheless, this week’s price action is disappointing for the Greenback. The question now of course is whether the pair is going for a test of the recent resistance at the 1.2830 zone. We believe the cards seem to be dealt that way. The risk apparently is for a renewed test higher. We continue with a sell-USD-into-strength approach and put the odds in favour of higher rates, up to the 1.29 zone and the stronger resistances at that zone.

Today, the market will pay attention to the US 3 yr auction in the absence of other events. A good auction could be slightly dollar supportive, but we don’t expect miracles from it. It is more an event for the fixed income markets.

EUR/USD (YTD): EUR/USD approaching key resistance.

Technically, the dollar bullish sentiment was abolished, as the pair moved back above the 1.2630-40 zone. Longer term this is still a broad sideways trading pattern that this pair is laying down though with tops at the 1.29+ zone.

Support is seen at 1.2751/45 (STMA/ break-up hourly), at 1.2725/17 (daily envelope / broken daily downtrendline), 1.2702 (MTMA), at 1.2687/81 last week low/ Nov 03 low), at 1.2659 (LTMA), at 1.2642/37 (neckline DB / weekly envelope) and 1.2623 (MT break up hourly).

Resistance is seen at 1.2797 (daily envelope), at 1.2810/19 (daily downtrendline, ST high), at 1.2832/45 (22 Sept high/ Bollinger top) and at 1.2880 (Aug 31 high) and at 1.2896 (Starc Top).

Yesterday, the EUR/GBP pair again developed an uninspiring trading pattern as it hardly moved beyond the limits of a very tight 0.6700/0.6710 trading range. During the US trading session the pair, in step with EUR/USD, tried to move a few ticks higher, but also this move could not be sustained and this morning the pair is back at the 0.6700-area, where it already was for most of this week.

The UK data yesterday failed to impact the trading with the NIESR GDP estimate coming out close to trend at 0.7%. The BRC retail sales monitor was solid enough in this respect downplays some less bright indications from the consumer side recently, but again the impact on trading was very limited. 

For EUR/GBP trading, two factors remain determining, namely the BoE rate meeting and the path of EUR/USD. Regarding the latter we cannot imagine a continued decoupling of EUR/GBP and EUR/USD as we see now.

The upmove in EUR/USD (if it continues) will get followed eventually by EUR/GBP. Regarding the Bank of England it is obvious that the market will want to see a rate hike on Thursday. The real item is what stance the Bank will in its statement afterwards. Will the sterling be able to draw enough comfort to still be more supported? Isn’t it already all factored in and could we then see some profit taking? That risk is on the rise certainly. ‘If it can’t go up, it must go down’ is a strange sounding FX wis-dom/mantra.

This morning consumer confidence rebounded from 89 to 98 and later in the session the BRC shop price index is scheduled for release. However, markets probably will count down to tomorrow’s interest rate decision and statement.

EUR/GBP (30 days): Trying to start an uptrend

Up until now, the EUR/GBP pair was well captured in the long-standing 0.70 to 0.67 area. Now this downward support zone is again falling, as last week the pair set new year lows. The down-ward pressure is still on, while the jury is still out there.

Support stands at 0.6692(broken daily downtrendline), at 0.6679 (previous low), at 0.6671/69 (Boll. Bottom / new year low) and at 0.6664 (1st irr B off 0.6794).

Resistance comes in at 0.6707 (Bollinger midline), at 0.6713 (yest. High), at 0.6720/24 (LTMA / 26 Oct high) and at 0.6737 (23% retracement).

The pair is back in ST neutral territory.

Yesterday, the tone in USD/JPY trading had been set overnight with Fed’s Yellen comments on potential diversification out of dollars. BoJ governor Fukui in the morning then opened the path to a December rate hike in Japan and this also helped the yen to some extent.

USD/JPY came under pressure early on and this sentiment of selling the dollar into strength was the overriding theme for most of the session. Dollar losses built and as the pair fell back below 118 some stop-losses even appeared to be triggered. It went quickly downhill to the low 117’s, a real sell-off. However, later in the session things calmed down and the dollar settled in the mid-117 area were it is still trading this morning.

Remarkably, markets (both the bond market and the currency market) at this stage don’t show much reaction to a hawkish interview of Fed governor Lacker in the FT (cfr Treasuries part).

The US elections still hold the news headlines this morning with the democrats gaining a majority in the House of Representatives, but the impact on the dollar is still limited. Japanese data (leading indictors) failed to move the market, too.

Over the previous sessions, the market sentiment clearly was USD-sceptic, to say the least. However, the interesting part of the story still has to come, or to put it another way, the easy part of the dollar correction might be over now as the dollar in a lot of cross rates now comes closer to important support levels. 

Regarding USD/JPY trading, the pair should now go for a test of the recent lows at the 116.70 area to show the determination of the yen or else all will be for nothing once more…

The long-term bias still is that the topside in the US currency should become more difficult and this should translate in the pair looking a bit capped and drawn to the downside.

USD/JPY (30 days): Preparing a test of the recent lows?

Recently, the topside in USD/JPY had become too difficult, as the test of the year highs was rejected. However, the downward correction that was developing apparently is aborted after the US payrolls report last week. So, the pair is back in neutral territory.

Support is seen at 117.50/45 (today low/daily envelope) at 117.23 (yest. Low), at 117.09 (weekly envelope) and at 116.64/57 (Boll bottom / last week low) and at 116.41/18 (targets double top off 118.03).

Resistance is seen at 117.76 (broken daily channel bottom), at 117.98 (MTMA) at 118.31 (ST high + daily envelope + Boll. midline), at 118.45 (week high), at 118.84 (weekly envelope).

The pair is back in neutral territory.