HIGHLIGHTS

  • Bond Markets:
    • US Treasuries at key levels after weak US data
    • European bonds again fail to break higher
  • Currencies: EUR/GBP explodes
  • News: FOMC Minutes highlight of the day

CURRENCIES: EUR/GBP explodes

Yesterday the ECB hawks were out in force again with Wellink and Garganas growing headlines. Wellink reportedly said that rates were ‘damn low’. Garganas insisted that liquidity is high, rates remain at low levels and monetary conditions still loose.

The implications are obvious, but the market already knows their point of view and is now wondering what this means beyond 2006 for the whole of the ECB. The December rate hike has been a done thing for a longer while, but what to expect from 2007. The euro was unaffected by this latest round of comments.

The waiting started for the US data in the afternoon. The pair stabilized at the 1.2820/.30 zone. The retail sales came out close to expectations, but the PPI came out very low, putting the Y/Y number in negative territory.

The headline PPI dropped 1.6% M/M, the core dropped, even more surprisingly 0.9% M/M. This had a dollar negative impact, but it wasn’t too outspoken, with the pair moving to the 1.2860 zone. This disappointed the dollar bears, giving courage to dollar bulls that the EUR/USD up-move had become overextended short-term. A dollar comeback was attempted with some degree of success, bringing the pair back down to the 1.28 area.

The recent eco data out of the US however confirm our view that the pair should be supported and a sell-USDinto- strength attitude can be maintained. Yesterday’s price action shows that the upside is becoming more difficult short-term, but nevertheless the bias should be kept. Dollar gains should be contained all in all.

Today, the market players will during the day focus on the NY Empire manufacturing index for guidance, but the evening’s FOMC Minutes will be awaited for more info on the Fed’s future decisions. The Minutes could be of a major impact for dollar sentiment, as the Greenback is somewhat doubtful lately and is looking for some foothold. It is questionable though if it can find it in this report, as the Fed may show more concerns on a slowing economy.

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 1.2802 (broken downtrendline), at 1.2775 (daily envelope), at 1.2743 (weekly STMA) and at 1.2725 (break-up) and at 1.2709 (Broken daily downtrend line).

Resistance is seen at 1.2857 (daily envelope / breakdown) and at 1.2896/1.2900 (daily Bollinger top / last week high).

EUR/GBP yesterday moved up clearly from the 0.6740 zone to the 0.6760 zone. The up-move came about yesterday on the release of the UK CPI data. These came out lower than expected, at 2.4% the same as in Sep), whereas 2.6% Y/Y had been expected. Underlying core inflation stabilized too at 1.4%Y/Y. This data release clearly hurt sterling sentiment, as the pair at that time started its up-move for the day.

The EMU GDP number came out just below consensus at 0.5% Q/Q (vs. 0.6% exp.), but this couldn’t weigh on the euro, which had already received the shock last Friday with the poor French GDP number.

Price action yesterday was a boost for the euro outlook as the pair overtook the 0.6736 resistance area in a sustained way. This concludes the bottoming out process and installs a buy-euro-on-downtick attitude in this pair.

Today, the market will take a look at the UK labour market report and the EMU industrial production for some guidance. The break above the 0.6740 zone now needs to be confirmed on the day. In that regard the BoE inflation report today will be key. More inflationary fears should be sterling positive. We expect it to justify the recent rate hike, but not throw more oil on the fire, so not be overly hawkish, bringing only limited, if any, sterling support.

Up until now, the EUR/GBP pair was well captured in the long-standing 0.70 to 0.67 area. This downward support zone has held and the bottoming out process was concluded yesterday with a clean break above 0.6736, installing a bullish euro mood ST.

Support stands at 0.6742/.40 (daily envelope / STMA), at 0.6727/.22 (ST low / LT MA) and at 0.6713 (break-up Nov 08).

Resistance comes in at 0.6765/.69 (yesterday high / Oct 06 high), at 0.6778/.80 (daily envelope / 1st target off 0.6734 double bottom) and at 0.6794/.99 (Sep 29 high / 2nd target off 0.6734).

USD/JPY yesterday ticked down after the softer than expected US PPI numbers, but the yen couldn’t hang on to the gains as the dollar made a small comeback, ending the day almost unchanged for USD/JPY at the 117.60 zone.

Overnight there was the news that the ‘big 3’ US car makers had spoken with US president Bush, saying that he needed to take action ‘to address the weak yen’. This had no immediate market impact though. The market view is that Bush can do little or doesn’t want to do much at this moment.

This morning, Japan’s tertiary industry index fell more than expected. The reason behind this was reportedly weakness in wholesale and retail trade, as activity here fell 3.1% M/M. It is argued that the warm weather is hurting retail sales, but these will likely rebound.

We continue to propose a sell-USD-intostrength approach in this pair. On the downside the 116.57-reaction low remains the obvious important support for the USD and we feel it could be tested during the next week(s).

US data will of course point out the shortterm direction. The FOMC Minutes today and the CPI and TIC data tomorrow in that respect will be key.

That’s why the pair is presently caught in a bit of a wait-and-see attitude, wallowing around in the middle of the road, between the boundaries at the 118.50 and 116.50 zones.

Today, the Bank of Japan kicked off its two-day meeting, but we won’t be getting any headlines before tomorrow morning. We expect the Bank to stay steady, also not altering its statement much, sticking to the assessment the economy is ‘expanding moderately’ and is ‘expected to continue expanding moderately’. Any comments from Fukui afterwards should be more valuable.

The market is looking for clues on the timing of a next rate hike. Any signal that it could be coming sooner should be yen supportive.

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. The pair is clearly in a sideways mode for now.

Support is seen at 117.53 (today low), at 117.23 (last week low) and at 116.95 (previous MT reaction low) and at 116.61/.57 (Bollinger bottom / low 1 Nov).

Resistance is seen at 118.03 (ST breakdown), at 118.29 (week high / LT MA) and at 118.59/.92 (Nov 09 high / daily projection band top).