HIGHLIGHTS

  • Bond Markets:
    • US Treasuries higher erasing some more post-payrolls losses
    • ECB’s Trichet hints at a continuation of the tightening cycle in 2007
  • Currencies: USD hardly affected by election result
  • News: BoE rate decision, ECB conference and US data spice trading today

CURRENCIES: USD hardly affected by election result

The euro has been on a roll this week versus the dollar. The best description actually is that it was caused by dollar softness; the dollar couldn’t build out gains after last week’s payrolls and thus disappointment kicked in.

The EUR/USD pair however doesn’t seem in a hurry to go somewhere short-term. Until now, the upside is going untested over the past two days with the pair staying away from important resistance at the 1.2830 zone.

Of course, this week there was not that much to guide trading. The data are largely absent. Today that can change, but only to a limited degree with the US trade balance on the agenda. Markets have also been looking at Fed speakers, but yesterday no news came either from that front. That left the market left to its own devices.

There was also a lot of attention for the US mid-term elections, but yesterday there still was a lot of uncertainty whether the democrats could also gain the Senate. According to media reports this morning, a Democrat victory in Virginia is now almost certain, which would indeed give the democrats a majority in the Senate. Some marked this scenario as somewhat dollar negative, but up until now it didn’t trigger much dollar repositioning yet and EUR/USD still stays away from the 1.2830-resistance. Is this a early sign of growing dollar resilience, also as it couldn’t be hurt by the resignation of Rumsfeld?

As said, today the US trade data will be published and to some extent they also might be linked with the elections as the Democrats are seen as having a somewhat tougher stance on the growing trade deficit with China. However, it is unlikely that this will already be a factor of importance today, especially as the headline deficit figure of the report, according to consensus, is expected to come down from USD 69.9 bln in the previous month to USD 66.0 bln in September.

The ECB monetary conference could also be an influence on EUR/USD, so look just below in EUR/GBP part for details on this. In line with our scenario for a further cooling in US economic activity, we continue with a sell-USD-into-strength approach and put the odds for a re-test of the 1.2830 zone and a potential break.

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 1.2744 (Yest. Low/STMA), at 1.2724/15 (daily envelope /broken daily downtrendline), 1.2702 (MTMA), at 1.2687/81 last week low/ Nov 03 low), at 1.2658 (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 1.2808/19 (daily downtrendline/ week high), at 1.2832 (22 Sept high), at 1.2853 (Bollinger top) and at 1.2880 (Aug 31 high) and at 1.2894 (Starc Top).

EUR/GBP yesterday stayed sideways at the 0.67 zone, with only very minor intraday moves. Overnight, the pair briefly dropped below the 0.67 threshold, but at the moment of writing we are already back above this mark.

Today, the market will of course be focused on the Bank of England interest rate decision. A rate hike looks a done thing though and this should be factored in by sterling. That may be why we see some cautious attempts for profit taking these past days.

The market will keep an eye on the statement too. Clues for more rate hikes in 2007 will be picked up as sterling positive. Absence could engender some more profit taking. Especially as the downside looks better protected recently, this is an upped risk. Indeed, somewhat better data out of the UK such as the BRC retail sales and consumer confidence couldn’t help the pound sterling earlier this week. This shows it may be a bit overextended at this stage and in need of some correction. Yesterday’s BRC shop prices showed a dip in M/M prices, but were well up Y/Y in Oct to 1.52% from 1.11% Y/Y in Sep. Besides this, in the morning, the market will also look closely at the UK trade balance. This has become a potential driver for EUR/GBP rates recently.

Also, the ECB monetary conference can have some impact with quite some ECB speakers. Trichet already highlighted the importance of money supply data. As this is running well above the ECB reference rate, one can expect some hawkish interpretations. That could show that on balance the ECB would be inclined to go on hiking in 2007. That could at least become clearer also today. That should be a euro positive.

The EADS/Airbus story is also a potential influence on EUR, as the market is still looking at potential cancellations (UPS/ILFC after recent cancellation of FedEx). Thus could be euro negative. On the other hand, there is also a rumour of Dubai investment looking to buy a big stake in EADS.

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

Support stands at 0.6689/84 (ST low/Daily envelope), at 0.6679 (previous low), at 0.6675/69 (Boll. Bottom / new year low) and at 0.6659 (1st irr B). Resistance comes in at 0.6708 (daily envelope), at 0.6713 (Week high), at 0.6720/24 (LTMA/ 26 Oct high) and at 0.6737 (23% retracement). The pair is back in ST neutral territory.

USD/JPY stayed stable until US traders entered the market and bought back some dollars. This drove USD/JPY from the 117.50 area to the 118 area without any news. The US elections gave a lot of headlines, but apparently little market impact. (see also EUR/USD part for details). In this respect yesterday’s price action, contrary to what we saw earlier this week, even suggests some short-term dollar resilience as the Democrats taking over the majority in the US Congress/ Rumsfeld resignation at this time had no negative impact on the dollar.

This morning, Japanese data (Money supply and machine tool orders) were too close to expectations to cause a market reaction worth mentioning. Overnight, there also were some headlines on the screens as Finance Minister Omi in a speech mentioned that ‘the prospect of escaping from deflation is clear’. However, as already was the case with some comments from BoJ’s Fukui recently, this kind of headlines at this stage still isn’t enough to give the yen a lasting support.

Despite yesterday’s uptick, we still believe underlying market sentiment to be a bit USD-sceptical.

Regarding USD/JPY trading, the bias still is that the pair is looking capped short-term. That could open further possibilities to the downside. For our scenario to remain valid short-term, USD/JPY should stay below the reaction high at 118.45. On the downside, the 116.50 support zone of recent lows could be an important test of just how strong the will of the yen is to go on a counter offensive.

Today, the US trade balance could be a market mover. USD/JPY is often the most vulnerable to this. We expect a coming in of the deficit. This is mostly related to oil items though. A result almost in line with expectations will have no market impact, we believe, even if it comes in from the prior 69.9 B to some 66 B$ now.

Also note, there will be some attention for the Michigan consumer confidence. This is expected to show stabilisation at 93.6. A large deviation could affect dollar sentiment. 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 afterwards also was aborted after the US payrolls report last week. So, the pair is back in neutral territory.

Support is seen at 117.45 (daily envelope) at 117.23 (week low), at 117.09 (weekly envelope) and at 116.65/57 (Boll bottom / last week low) and at 116.41/18 (targets double top off 118.03).

Resistance is seen at 118.00 (ST reaction high) at 118.13 (ST break-down), 118.24/32 (Boll. Midline/daily envelope), at 118.45 (week high), at 118.84 (weekly envelope).

The pair is back in neutral territory.