HIGHLIGHTS

  • Bond Markets:
    • US Treasuries slightly higher in dull pre-holiday session
    • Euro rally halts flattening European yield curve
  • Currencies: EUR/USD at the top
  • News: German IFO business confidence highlight of the day

CURRENCIES: EUR/USD at the top

The EUR/USD pair yesterday again ticked higher and broke above recent highs at 1.29 and the August highs at 1.2939.

The EUR/USD rise was all about general softness in the US dollar, also reflected in other currency pairs such as GBP/USD or USD/JPY for instance.

The afternoon’s eco data couldn’t help the dollar. Claims rose by 12K to 321K. The final Michigan consumer confidence was almost unchanged at 92.1, but this was slightly below market expectations.

Most attention yesterday went to the policy makers’ positioning in respect of the ECB policy on rates and FX. This issue has been instigated by French PM De Villepin last week with his search for an explicit FX policy taking into account growth, jobs and industry protection. His calls were instigated after the recent problems of France’s Airbus company.

Last Thursday his President, Chirac, followed along the same lines. He said he had extreme respect for the ECB, but he found it legitimate to question “the way monetary policy is conducted”. Also from Germany calls are increasing for the ECB to ‘take a breather’ regarding rate hikes…

EU’s Almunia now meddled in the debate, asking to leave the power at the ECB to conduct its policy independently.

This would probably imply a less fast response to a rising euro than if politicians would be left in charge.

But not even all politicians seem to agree with France’s point of view. Yesterday, Luxembourg’s Juncker said we had not reached the situation ‘where euro exchange rate is causing suffering’.

This sort of comments is taking away concerns from euro bulls and probably helped sentiment forward yesterday for the single currency.

Today, the US market is closed for Thanksgiving. This could leave the market a bit orphaned and lead to some mild profit taking as a break above 1.2980 zone seems impossible on a day like this.

EUR/USD (2 days): moving close to the highs!

Technically, a dollar negative sentiment was installed, as the pair moved back above the 1.2630-40 zone. Now the pair is coming near the year highs. A break should be difficult at first.

Support is seen at 1.2909/1.2900 (daily envelope), at 1.2871 (STMA), at 1.2835 (yesterday low).

Resistance is seen at 1.2958 (yesterday high), at 1.2979 (year high) and at 1.30 (psycho + Starc top).

The EUR/GBP pair dipped during the first part of the day to the 0.6740 zone. M&A talk is still much cited to underpin the sterling with talk of a link-up between for instance CSN-Corus, Blackstone- Home Retail group and Iberdrola-Scottish Power.

The BoE’s MPC Minutes of the last meeting showed a surprise, as the vote was 7-2 for a rate hike instead of the expected 8-1. Lomax also joined the no hike camp of Blanchflower. She however did that on different considerations. Still, the sterling shouldn’t like this too much.

We still keep a buy-euro-on-dips attitude. Last week we already wrote that we wanted a wide dip to the mid 0.67 zone. We reached that now, so some timid euro buying could occur at this stage. The comments of CBI director Lambert that he expected no big pay rises at UK firms over the coming wage negotiations could be seen as a negative for the sterling, if this scenario pans pout.

We however do not like the M&A stories. In the past, this has often made the sterling a strong performer for a prolonged period of time. This could imply more sterling strength again towards the lower end of the 0.67 zone. A break below though on these kind of stories looks more difficult.

Often M&A stories are also the kind on which to buy the rumour and sell the fact…

Today, attention should shift to the EMU’s IFO business sentiment survey for some fresh guidance. A stabilization at 105.2 is expected.

EUR/GBP (30 days): in the middle between 0.67 and 0.68

Up until now, the EUR/GBP pair was well captured in the long-standing 0.70 to 0.67 area. More recently this even seems to be between 0.67 and 0.68…

Support stands at 0.6749 (daily projection band bottom), at 0.6742 (week low) and at 0.6734 (neckline double bottom).

Resistance comes in at 0.6764 (yesterday high), at 0.6780/.84 (ST highs) and at 0.6794/.94 (daily Bollinger top + last week high / 2nd target off 0.6734).

USD/JPY reflected the general dollar softness as well yesterday, as the pair dipped form the 117.80 zone to the 116.60 area.

Yesterday morning, the battle between the BoJ and the government continued expanding. The government downgraded the outlook for the economy. This was the first downgrade since 2004. This was widely anticipated and is seen as a warning shot to the Bank of Japan not to hike rates too fast.

The BoJ’s Iwata immediately (within minutes!) reacted with a statement that the Bank will use its (own) outlook for setting rates. The message to the government is clear: ‘do not try to meddle’…

But the reality of Japan in our view is still that the pressure of the government may be a factor to take into account when setting rates or having expectations for it going forward. The reluctance of the government is enough for us to see a December rate hike very difficult. The politically acceptable Q1 ’07 is now very likely, just ahead of the start of a new fiscal year on April 1, ’07.

The government’s struggle against the bank is of importance for the yen as it may hold the currency back.

Today, Japanese and US markets are closed. This could leave the market moving about a bit erratically. A sustained break below 116.50 support should thus be difficult.

Regarding USD/JPY trading, we continue to propose a sell-USD-into-strength approach, but having come at such an important support level on a holiday, we feel today is not the day to push ahead and look instead for an upward correction first.

USD/JPY (30 days) testing the downside

As the topside in USD/JPY had become more difficult (after a failed test of the year highs), the market went the other way and now finds itself at new crossroads at the downside at the 116.50 zone…

Support is seen at 116.56 (daily Bollinger bottom), at 116.36 (yesterday low), at 116.18 (target off 118.03) and at 116.09 ‘Sep low).

Resistance is seen at 117.05 (daily envelope), at 117.36 (STMA) and at 117.67/.72 (MT MA / ST breakdown).