HIGHLIGHTS

  • Bond Markets:
    • US Treasuries close the week with some moderate gains and the long end erasing all post-payrolls losses
    • European bonds building out gains, but key resistance looming
  • Currencies: USD still on the defensive
  • News: Heavy (US + UK) market calendar this week

CURRENCIES: USD still on the defensive

Last Friday, there was limited follow-through from Chinese central banker’s Zhou comments on Chinese forex reserves diversification, which implied diminishing dollar holdings in the future. The USD lost some additional ground early on, bringing the pair to the 1.2890 mark, but a counter reaction followed later on in the day bringing the pair back down to the 1.2850 zone.

This morning though the USD is again on the defensive, with the pair in the 1.2870 zone.

Remember last week’s drought in economic data? Well, start forgetting all about that.
This week is completely different. US data just keeps coming. There are hard data such as retail sales, industrial  production and housing, there are price data, such as PPI and CPI, there are the Fed Minutes for guidance and there are FX related data such as the TIC flow release. This all looks very promising for an agitated week.

The EUR/USD pair finds itself still close to recent highs and important resistances at 1.2939 and the year high at 1.2979. These could be testing times with the present agenda filled with potential new inputs.

Due to recent price action, we continue with a sell-USD-into-strength approach.

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 1.2820 (10 Nov low), at 1.2769 (9 Nov high) and at 1.2746 (8 Nov low).

Resistance is seen at 1.2901 (10 Nov high), at 1.2939 (21 Aug high) and at 1.2979 (year high).

EUR/USD is in short-term overbought territory.

Sterling had a tough moment after the BoE rate hike last Thursday. Some profit taking developed bringing the EUR/GBP pair up to the 0.6740 area. On Friday, some of this movement was unwound, as the pair retreated intraday to the 0.6720 zone.
This happened as French eco data (GDP, CPI) disappointed in the morning. This morning the pair is still in that area.

Last Friday’s ECB conference and the attention to money supply data could not help the euro anymore, although this could point to more rate hikes necessary.

We feel the sterling as richly priced for the near term, which should put a floor under this EUR/GBP pair for now. This should translate into a buy-euro-on-dip sentiment. This is also based on the view of some more potential upside in EUR/USD.

Moving above the 0.6734-neckline (still close) in a sustained way would be a clear signal that there is more topside to come.

In any event, the eco calendar will be a driver to reckon with this week and could set the longer-term direction. The BoE quarterly inflation report seems to be the key element in this (we will discuss this to greater lengths later this week), but let’s not forget Thursday’s retail sales.

Today, attention goes to the UK PPI (exp. –0.1% M/M and + 1.9% Y/Y), but more attention will go to tomorrow’s CPI of course.

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 0.6712 (7 Nov highs), at 0.6701 (9 Nov intraday high) and at 0.6695 (7 Nov low).

Resistance comes in at 0.6745 (16 Oct high), at 0.6756 (13 Oct high) and at 0.6769 (11 Oct high).

USD/JPY edged slightly lower last Friday, moving from the 117.70 zone to the 117.50 area, without major news. It is thought to be some follow-through after PBOC’s Zhou’s comments on diversification on Thursday, although this was by now limited.

This morning the pair seems under more downward pressure as it went to the 117.30’s. This came about as a Chinese state think tank, the ‘State Information Centre’, said that ‘China should actively manage and diversify its foreign exchange reserves so as to increase its returns’. This keeps the diversification talk instigated last week by PBOC governor Zhou at the forefront in this pair and the USD under pressure.

This morning’s Japanese data seemed to have less of an impact. Corporate goods prices fell M/M by –0.3% (to rise 2.8% Y/Y). The trade balance result was close to expectations as was the production data (final figure). This didn’t hurt the yen though. Neither did a FT article giving comments form ex-cabinet Minister Takenaka who said the BoJ was rushing too much in normalising monetary conditions.

Despite an up-ticks in USD/JPY last week, we kept the belief that the market was underlying having doubts over the USD longer term.

We were not convinced by the trade deficit coming in lower, and even not by the stronger payrolls report. The feeling remains that the USD has taken it too far to the upside ST. Now some correction could occur. So we look to sell the USD into strength.

On the downside the 116.57-reaction low remains the obvious important support for the USD. We look for a test this week.

As mentioned in the EUR/USD part, there are quite some US eco data of significance this week. These should drive the USD/JPY pair too. Look out for those Fed Minutes and inflation data and the TIC net capital flow data especially in this pair.

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. The pair is in a sideways mode for now. 

Support is seen at 116.90 (3 Nov low), at 116.67 (2 Nov low) and at 116.57 (1 Nov low / key).

Resistance is seen at 117.68 (10 Nov intraday high), at 117.94 (10 Nov high) and at 118.46/.59 (6 Nov high / recent. high).