HIGHLIGHTS

  • Bond Markets:
    • US Treasuries trade sideways. More of that today?
    • European bonds moving closer to tough resistance
  • Currencies: China diversification rumours hit USD
  • News: French eco data and ECB conference main topics for today

CURRENCIES: China diversification rumours hit USD

At first it looked that the EUR/USD pair was to maintain a sideways pattern with the limits set out earlier this week. However at around the close of the European session, dollar ceded quite some ground and EUR/USD broke above the key 1.2830 resistance area.

During the morning session in Europe, the single currency drifted higher towards the 1.28-area. However, early in US trading, the trade balance came out smaller than expected at 64.3 bln $. It caused a downtick from the 1.28 zone to the 1.2760 area at the time. (for details see USD/JPY part).

Later in the session, the headlines came out far less dollar-friendly. At first the Michigan consumer confidence came out on the weaker side of expectations and somewhat later a news agency mentioned Bank of China Governor Zhou Xiaochuan indicating that China had a plan to diversify its USD 1 trillion foreign exchange reserves. This of course suggested a greater portion of euros and pulled the trigger for EUR/USD to clear the 1.2830 barrier.

Yesterday, the market was also looking out for fresh ECB headlines. In the morning in an FT article ECB’s Trichet had in a way opened the door for more rate hikes after December, without however being too specific or enough. It needed a clarification for the markets, but it didn’t come. Overnight, the dollar negative sentiment triggered by the China diversification headlines was maintained with EUR/USD trading at around the 1.2850 area at the moment of writing.

We continue with a sell-USD-intostrength approach. The China headlines probably won’t be forgotten soon and also the ECB headlines might continue to be euro friendly. The ECB could be coming closer to a more hawkish stance, while we weigh the recent Fed statement and eco data such as the poor ISM heavier than the payrolls report. The trade deficit release balance isn’t even considered to be put on the balance, as it hasn’t been able to move the market for a very long time, illustrating the dollarskeptical market sentiment. The August high (1.2935) and the year high at 1.2979 might be within reach now.

Today, US calendar is empty. There are some European (French) data on the calendar, but the focus most probably we be on the ECB conference on monetarism.

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 1.2819 (Previous ST high) ,at 1.2805 (Broken daily downtrend line), at 1.2793 (daily envelope), at 1.2744 (MTMA), at 1.2713 (broken daily downtrendline), 1.2702 (MTMA), at 1.2681 (Nov 03 low/Boll Midline), at 1.2663 (LTMA).

Resistance is seen at 1.2868 (Today high?), at 1.2880/85 (31 Aug high/Boll top), 1.2939 (August high) and at 1.2979 (Year high).

EUR/USD is in Short term overbought territory . Yesterday, all attention went to the Bank of England. It was time for the BoE to put the chips on the table and hike rates by 25 bp to a full 5.00%. So happened, the market expected this and looked at the statement.

The real issue was what stance the market would take after the BoE decision and statement. The latter couldn’t fire up emotions. Comments were pretty standard and the euro started gaining on some profit taking on sterling longs. EUR/GBP at first jumped to week highs at the 0.6720 zone but in line with the euro positive momentum later in the session the gains were extend with EUR/GBP setting highs in the 0.6735 area.

We feel the market is now perceiving the sterling as richly priced for the near term. That could permit some more upside in this pair. Moving above the 0.6734-neckline (under test now) in a sustained way would be a clear signal that there is more topside to come ST. One small remark, if the euro strength indeed is driven by China diversification woes, question is whether the sterling hasn’t a role to play as well in the diversification story. We don’t se this story as driver in this pair longer-term, as it can work for both currencies. In fact, in the past it has most likely already worked to the sterling’s advantage, as the currency this year overtook the yen as third largest central bank holding currency after USD and EUR…

Today, the UK calendar is empty. The focus also for EUR/GBP trading most probably will be on the ECB conference on monetarism. The overnight story of MI5 reporting terrorist threats in the UK may be seen dampening sterling buying this morning.

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. However, a sustained break apparently isn’t that easy.

Support stands at 0.6619 (Daily envelope), at 0.6713 (ST break-up + MTMA) at 0.6603 (MTMA), at 0.6699/86 (ST low/ LT daily Downtrend line ), 0.6669 (new year low).

Resistance comes in at 0.6738 (ST low), at 0.6748 (Envelope daily), at 0.6752 (23% retracement), at 0.6763 (Starc) and at 0.6769 ( O6 Oct high). The pair is ST overbought territory. For USD/JPY, the US trade balance was the main event of the day yesterday. The headline came out lower than expected at 64.3 B $. It was expected to come down from USD 69.9 bln in the previous month to USD 66.0 bln in September. This implied growth would be revised upwards. This encouraged the USD in a first reaction. USD/JPY rose from the 118.10 area to intraday highs above 118.50.

However, the release was forgotten quite soon, probably also as it was mostly down on lower oil prices. So, one trade balance month isn’t enough to go by in these circumstances. Later in the session a weaker Michigan consumer confidence again hit the dollar and the USD/JPY pair gave back all the posttrade balance gains dipping back below the 118-treshold.

This morning, BOJ’s Fukui again repeated previous signals that the BOJ intends to raise rates slowly. His comments were in line with indications earlier this week but didn’t give any hint on the concrete timing. The yen gained some ground earlier in Asian trade this morning, but this move was blocked later in the session as the Japanese machinery orders came out very poorly. (-7.4% M/M / -1.5% Y/Y).

Despite recent upticks, we still believe underlying market sentiment to be a bit USD-sceptical. We are not convinced by the trade deficit or other data. We feel the USD has taken it too far to the upside and now some correction should occur, selling the USD into strength. The highs above 119 should be a bridge too far at this stage. On the downside the 116.57- reaction low remains the line in the sand. A break below this is needed to change the MT picture in favour of the yen.

Of course, while the dollar is in the defensive, it’s probably not correct yet to consider the recent price action in USD/JPY as yen strength. EUR/JPY yesterday showed where the real strength is with EUR/JPY clearing the previous highs and hitting a new lifetime high above the 151-barrier.

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 117.42/37 (LT daily Downtrend line + daily envelope/ST low) at 117.23 (week low), at 117.09 (weekly envelope) and at 116.67/57 (Boll bottom / last week low) and at 116.41/18 (targets double top off 118.03).

Resistance is seen at 118.00 (ST break down) at 118.26/35 (Broken LTMA/daily envelope), 118.59 (Yest. high), at 118.84 (weekly envelope).

The pair is close to overbought neutral territory.