HIGHLIGHTS

  • Bond Markets:
    • US Treasuries down after upbeat US NY Fed survey
    • European bonds fall off the highs
  • Currencies: USD not (yet) inspired
  • News: Busy calendar in US and retail sales in UK highlights today

CURRENCIES: USD not (yet) inspired

The EUR/USD pair stabilized yesterday. The US data and events couldn’t alter this picture, with EUR/USD still at the 1.28 zone this morning, awaiting fresh data.

The NY Fed Empire survey came out much better than expected, as it rose to 26.7 from 22.9, while the market was positioned for a small decline. This however couldn’t inspire much dollar buying.

The FOMC Minutes gave some volatility in EUR/USD. At first the dollar tried to gain as the Minutes did not give anymore ammunition to the rate cut believers and this jacked up rates at the short end of the fixed income curve. But the dollar couldn’t maintain gains on this non-event and the euro came back.

Recent price action did show us that the upside is becoming more difficult in the very short-term, but that‘s exactly why we should wait for dips to buy back euros / sell dollars.

The pair has been behaving calmly though all in all. Some profit taking after last week’s run-up in the pair was only logical. After all the pair had run up from the 1.25 area mid October to the 1.29 mark this week.

Today, the market can no longer play this wait-and-see game most likely. The impact of the CPI and TIC data (see USD/JPY part for preview) can be much bigger than that of the PPI or NY Fed over the prior days… EUR/USD (2 days): NY Fed and FOMC Minutes cannot inspire. Can CPI and TIC do just that?

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 (STMA), at 1.2782/71 (daily envelope+ MTMA / yesterday low), at 1.2743 (weekly STMA) and at 1.2706 (downtrendline off euro high).

Resistance is seen at 1.2835 (ST high hourly), at 1.2863/.77 (daily envelope / previous high) and at 1.2900/.07 (last week / daily Bollinger top) and at 1.2939 (high 21 Aug).

Yesterday UK data took the driver’s seat. The Labour market report showed earnings growth moderating, while unemployment continues to rise. In the current somewhat softer sterling sentiment this report was enough to keep the upmove in EUR/GBP going.

The conclusion of the report is that inflationary pressures from this angle should be all in all moderate and won’t give the Bank of England a reason to look more at rate hike(s).

The BoE inflation report also fitted in well with currently prevailing market sentiment, as it stated that inflation could be returning more rapidly than expected to target. This also points to a dovish attitude for now.

The growth outlook was slightly stronger than in the August report, but this was ignored by the market.

The impact on sterling on the day was obvious with EUR/GBP moving higher from the 0.6760 zone to the 0.6790 area.

This morning, the RICS house price index (balance +48.1, fastest pace in +4 years) showed considerable strength, but in the current market sentiment appears to be unable to generate sterling strength. This seems quite telling.

This week, the technical picture improved dramatically for the single currency. The break above 0.6734 opened up targets at 0.6799.

This now comes close, so further upside should be difficult. We would only buy euro on significant dips from now on.

Today, again more data with the UK retail sales and the EMU CPI. These could give some more guidance intraday.

EUR/GBP (30 days): finally taking off above 0.6736 for an upward stretch.

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 this week with a clean break above 0.6736, installing a bullish euro mood ST.

Support stands at 0.6775 (daily envelope), at 0.6765 (ST break-up) and at 0.6746 (break up daily Nov 13).

Resistance comes in at 0.6792/.94 (today high / Sep 29 high + double bottom), at 0.6799/0.6801 (2nd target off 0.6734 ST double bottom) and at 0.6815 (50% retracement).

USD/JPY ticked up slightly on the day. USD gains however had come before the US data releases (impact tsunami alarm?), demonstrating the sideways character this pair has adapted over the past two weeks.

In the afternoon, the NY Fed survey ticked up surprisingly but couldn’t inspire much dollar buying. Yesterday evening, the dollar tried to gain on the FOMC Minutes as it didn’t see a significant change and thus didn’t give validation to a lot of pre-positioning for rate cuts next year. But the upmove in dollar was very limited and petered out immediately. A counter pro–yen reaction also brought the pair nowhere.

The yen tried to gain on comments from deputy governor of the PBOC Xiaoling as he said they had been buying yen for the country’s reserves. This only led to a brief limited downtick in USD/JPY and EUR/JPY.

This morning, the BOJ stuck to its previous statement and kept rates unchanged. It saw the economy still ‘expanding moderately’. It didn’t appear to have an impact on FX. BoJ governor Fukui’s speech wasn’t more valuable unfortunately. He stuck to the well known mantras, as he indicated that he had no preset idea on timing of future rate hikes. He did say though that the recent soft data did not change the BOJ assessment. This only confirms the market view that more rate hikes will come, likely in Q1 ‘07.

The heat appears to be turned on in EUR/JPY with the pair again close to the highs (151.48). Recent comments of France’s Villepin on the strong euro were countered by Japanese sources saying the market should set rates. This could lead to a battle of words, as a growing number of European policy makers is beginning to find the EUR/JPY rate exceedingly high and a potential problem for the economy.

We continue to propose a sell-USD-intostrength approach in this pair. The pair presently appears to be caught in a sideways pattern, in the middle of a range between the 118.50 and 116.50 zones.

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).

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 117.76 (today low), at 117.49 (daily envelope) and at 117.11 (week low) ahead of 116.57 (Nov 01 low).

Resistance is seen at 118.08 (today high), at 118.29 (week high + LTMA) and at 118.40/.59 (daily envelope / Nov 09 high).