HIGHLIGHTS

  • Bond Markets:
    • US Treasuries lower despite Treasury friendly eco data
    • European bonds’ failure to break higher suggests upside is limited for now
  • Currencies:     EUR/USD giving back some its recent gains
  • News:     US housing starts and ECB speakers figure on thin calendar

CURRENCIES: EUR/USD giving back some its recent gains

Yesterday, the EUR/USD pair stuck to the lower 1.28 zone.

The US inflation report was the key event of the day for markets. The CPI caused a small up-tick in EUR/USD to the 1.2830 zone, but this petered out fast ahead of the other US data in the afternoon.

Starting with the TIC data. An outcome of 72 B $ inflow was expected. It was somewhat lower at 65.1 B $, but this doesn’t seem to upset anyone, not even the dollar.

Later in the session, the headline figure of the Philly Fed report was in line with consensus, but the details disappointed and confirmed the broader view of the US economy cooling down going into 2007. Nevertheless, the dollar already ignored the lower CPI and tick data and walked the same road after the Philly, as EUR/USD drifted below the 1.28-figure after the release. Overnight, the dollar even traded slightly stronger again with EUR/USD at the 1.2765-area at the moment of writing.

Yesterday evening, we also got some headlines form French President Chirac joining its Prime minister who earlier this week expressed its concerns on the strength of the single currency. This kind of political pressure to closely monitoring the single currency might have played a role in the overnight EUR/USD weak-ness, too.

Recent price action showed the upside in EUR/USD has become a bit more difficult. However, at this stage we’re not impressed by the USD gains either, certainly taking into account the selling stretch it has faced recently. Re-call that since mid October the pair has gone from the 1.25 area to the 1.29 area at the beginning of this week. The 1.29/1.30 area is a very tough resistance. For that area to be cleared we probably need high profile USD/negative news. In this context, there might be room for some EUR/USD correction after the recent rally. We’re not in a hurry to add to EUR/USD long positions at the current levels, but we still look to buy euro on more pronounced dips versus the US currency.

Today, the housing starts will get the most attention in the US.

EUR/USD (30days): correction after the recent up-move.

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 1.2753 (daily envelope/ weekly STMA), at 1.2725 (Break-up daily), at 1.2704 (down-trendline off euro high) and at 1.2681 (3 Nov low/LTMA).

Resistance is seen at 1.2801 (STMA), at 1.2826/ (daily envelope/yest.high), at 1.2871/77 (Previous MT high) and at 1.2900/.03 (last week / daily Bollinger top) and at 1.2939 (high 21 Aug).

The data have been a bit more difficult for sterling this past week. The sterling sell-off started with the CPI numbers, not living up to expectations; the labour market report and BoE inflation report continued to set the tone for sterling softness. In this manner EUR/GBP rose to the 0.6790 zone, having started the week at the 0.6720 area.

However, yesterday, the stronger RICS house prices and the solid UK retail sales were a point of reflection for the market. The retail sales grew 0.9% M/M (and up 3.9% Y/Y). To be honest, at first the EUR/GBP only dipped slightly from 0.6790 to the 0.6780 zone, but later in the session EUR/USD drifting lower gradually filtered through into EUR/GBP trading as well. It isn’t a big U-turn yet, but also for this pair, the recent euro rally apparently is losing some momentum.  

We keep a buy-euro-on-dips attitude, but prefer a wider dip to the mid 0.67 zone before considering to buying back euros/adding to euro long positions.

Indeed, also the technical picture suggests that the upside at this stage is a bit more difficult. The targets of the break above the neckline of a double bottom formation at 0.6734 have been reached at the 0.6790 zone.

A move above 0.6794, the neckline of a longer term double bottom is a more difficult step, also as the market by now has moved from sterling overbought conditions to euro over-bought conditions short-term.

Today the UK calendar of eco data is empty.

EUR/GBP (30 days): First test of the 0.68-area rejected.

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, in-stalling a bullish euro mood ST. Yesterday’s price action suggests that the recent rally is running out of steam

Support stands at 0.6775 (ST break-up) and at 0.6746/41 (break up daily Nov 13/broken channel top), at 0.6724 (MTMA), at 0.6713 (Break-up daily) and at 0.6791 (Envelope weekly).

Resistance comes in at 0.6779 (Daily Boll top), at 0.6794 (ST high +Sep 29 high + Neckline double bottom), at 0.6799/0.6801 (2nd target off 0.6734 ST double bottom/38% retracement).

Yesterday, USD/JPY held a tight range close to the 118.00-barrier. However, as was the case for a series of other cross rates, the intra-day bias for trading was cautiously USD-positive.

The dollar already moved higher early in the session, but lost some ground going into US trading. At that time, the market was watching out for the US inflation data. These data came in slightly softer than expected. However, this didn’t impress markets. USD yields failed to move lower and also the dollar proved quite resilient with USD/JPY regaining the 118.00-area.  This morning, Japanese department store sales showed a negative reading but the impact on trading was limited. Also this morning, BOJ’s Fukui again confirmed the Bank’s cautions approach on monetary policy as he indicated that the chance on a December rate increase was not high. Remarkably, the yen is gaining some ground at the moment of writing.

This weekend, the Finance Ministers and central bankers join in Melbourne for the G20 meeting. The lack of flexibility in the Yuan exchange rate regime for sure will be an item of discussion, while other members most probably will also express their frustration with the current yen weakness. However, this for sure also was the case at previous meetings of policy makers. Question is whether much of the debate will be made public.  Regarding USD/JPY trading, we continue to propose a sell-USD-into-strength approach in this pair. The pair presently appears to be caught in a sideways pattern between the 118.59 and 116.50 zones. We have to admit that the upside of the range is now within striking distance but at this stage we don’t change tactics yet. A sustained break above 118.59 would open the way for a test higher (Stop-loss protection on USD shorts). On the downside the 116.57-reaction low re-mains the obvious important support for the USD.

USD/JPY (30 days): sideways, but 118.59 within striking distance.

Recently, the topside in USD/JPY had become a bit more 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 118.12 (daily uptrend line), at 117.82/76 (MTMA/daily envelope) and at 117.11 (week low) ahead of 116.57 (Nov 01 low).

Resistance is seen at 118.45/46 (Neckline double bottom/Today high), at 118.59 (Nov 09 high), at 119.01 (downtrend line since high) and at 119.33 (Daily Boll. Bottom).