HIGHLIGHTS

  • Bond Markets:
    • US Treasury trading resumes with a shortened session
    • Strong German IFO raises expectations for a continuation of the ECB tightening cycle in 2007
  • Currencies: USD at the lows
  • News: German CPI and French business confidence in the focus

CURRENCIES: USD at the lows

On Thursday, the strong German GDP and especially the better than expected German IFO business sentiment survey gave the euro a fresh boost. This brought about a rise to the 1.2970 zone, just a puff away from the year highs. A thorough test though was not undertaken at this stage.

This major barrier at the 1.2980 year high to 1.30 psychological level is a difficult hurdle to take at first and we could see some profit taking on those levels at a first attempt. That is why we continue with a buy-euro-on-dips attitude, betting we will still see dips towards thelower 1.29’s next week. Longer term we still go for that break above 1.30.

The US markets were closed though yesterday and this may have left the market without the depth and confidence to go for a real test of the highs. The pair came close (less than 5 pips!), but in the end returned to some safer levels near the mid 1.29’s.

Also, EU politicians kept rather quiet yesterday after many days of bickering over the ECB policy, the euro exchange rate and its effect on the economy. The division within political circles though is seen as euro positive as no front to hold back the euro is being formed for now. FX markets do not like to row against policy makers’ views for too long, as the case of the BOJ/MoF in the past has often proved it to be very difficult, for a prolonged time anyway.

Today, the US calendar is again empty and trading desks over there should still be thinly staffed due to the prolonged Thanksgiving weekend. We can focus on the French business confidence and German CPI for some guidance. This however may not be enough, implying that the cap at the year highs stays in place, with a slight bias for some profit taking on the euro on the day.

EUR/USD (‘06): almost hit the year 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 1.2900 (previous high), at 1.28544/.47 (ST break-up area), at 1.2832 (neckline ST double bottom) and at 1.2791 (downtrendline off high).

Resistance is seen at 1.2976/.79 (top yesterday/ year high), at 1.3006/.10 (2nd target / 5th wave equality) and at 1.3036 (1st target double bottom off 1.2832).

This week, the sterling was helped by M&A talk on taking over UK companies, which would bring about serious sterling buying (rumoured cash bids). EUR/GBP this week drifted lower from the 0.68 zone to the mid 0.67 area.

But having said that, this week’s BoE Minutes weren’t that hawkish, the CBI’s Lambert showed very confident wage negotiations wouldn’t derail and the euro data were again solid.

Indeed, yesterday, this was especially the case with the German IFO business sentiment report. This index rose for the second consecutive month (following three consecutive monthly declines) and the index now matches the cycle high of 106.8 again, which was reached already in June. At that time, that was suspected to have been the peak of the cycle. This new up-move may prove that was not the case and would be very good news for the euro area economy and thus for the euro. This certainly ups the chance of more hawkish talk from the ECB at their December meeting.

With this in mind, we keep a buy-euroon- 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.

We however do not like these persistent 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, UK GDP could be an important factor for trading, but it is a second estimate.

EUR/GBP (30 days): Stuck 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 0.6752 (low yesterday), at 0.6742 (week low) and at 0.6734 (neckline double bottom).

Resistance comes in at 0.6774 (top yesterday), at 0.6780/.84 (ST highs) and at 0.6794 (last week high).

Yesterday, the Japanese and US markets were closed for thanksgiving. This left the market moving about a bit erratically at first (this morning, the fixed income market was seen still reacting to the government economic downgrade of Wednesday afternoon…). The market was a bit hesitant and without the strongest of convictions, especially with levels so close to important support levels for the dollar at the USD/JPY 116.50 zone. But this area was tested during the day and as support crumbled the pair did make a break to the downside, with losses even deepening intraday to the 116.10 zone.

This couldn’t be maintained though and the pair this morning is standing at the 116.30 area. Still, this is a confirmation of the break and if maintained would open the road for more dollar losses. This general soft dollar sentiment can be maintained.

After Fukui’s slightly less hawkish stance last week after the BoJ meeting, this morning also board member Fukuma sounded soft, as he said ‘monetary policy will be conducted cautiously based on economic and price conditions without any preset idea on timing….there is a need to be aware of the risks of a slowdown in growth’. For us this is yet a reminder that December is off the charts for a rate hike. The Bank will prefer to wait a while longer and act again in Q1 ’07.

Regarding USD/JPY trading, we continue to propose a sell-USD-intostrength approach. A confirmed break below 116.50 would be another ST dollar negative signal.

Regarding China, the news came that Fed’s Bernanke will be joining the visit of China by Treasury secretary Paulson mid December. This will add weight to this visit and may see some USD nervous reactions ahead. For now, this is probably still too far off to have an impact.

USD/JPY (30 days) breaking below the 116.50 zone support…

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 even seems inclined to cross below the 116.50 support area, making a dollar bearish signal…

Support is seen at 116.19 (low today), at 116.03 (yesterday low) and at 115.84/.70 (targets daily channel break / 38% retracement).

Resistance is seen at 116.57 (neckline double top), at 116.82 (top yesterday), at 117.48 (ST breakdown hourly) and at 117.72 (breakdown daily).