HIGHLIGHTS

  • Bond Markets:
    • US Treasuries eked out modest gains despite pronounced dollar weakness
    • European bonds rally higher on stronger euro
  • Currencies: Volatile USD tries to fight back
  • News: Busy market calendar this week

CURRENCIES: Volatile usd tries to fight back

On Friday, the EUR/USD pair broke through the key 1.2980 year high and the 1.30 psychological level. This was supposed to be a tough level to break on a first attempt. The break may have become easier in hindsight due to the thinned market conditions on account of the prolonged Thanksgiving vacation. This morning, the pair even deepened the upmove, going in a panicky move to 1.3180, but this couldn’t be held on as the pair already returned to the 1.31 area by the time of writing.

Some say this upmove above 1.30 is now erratic and thus not significant. We respectfully disagree. The move was far too large and technically important to just discard it in our view. Maybe it was overdone, that even seems likely in a short-term perspective. So some pullback could be possible as the market now tries to figure out the depth of the move. But we would still keep a buy-euro-on-dip scenario in place at this juncture. We consider the break out of a long standing range considerably important. It is signalling the potential for a new trend, a new upleg for the euro or rather a downleg for the dollar.

In the EMU, the resistance to a stronger euro simply isn’t strong enough to scare off the forex traders. French Trade Minister Lagarde joined her government, declaring the euro’s recent rise has been considerable, just ahead of a visit to Japan this week. This may have dampened EUR/USD slightly for now.

But the French still seem isolated. German exporters declared that they can cope with the euro’s rise above 1.30 and forecast an EUR/USD rate of 1.40 by the middle of 2007...Peter Bofinger of German Chancellor Angela Merkel’s economic panel also said the euro’s climb above 1.30 gives no reason to panic, instead indicating 1.40 as line in the sand. In these circumstances the euro can still rise some more before running into political problems.

Today, the calendar is not that hot. It heats up though later this week, with tomorrow durables, consumer confidence and existing home sales and a speech of Fed’s Bernanke. On Wednesday new home sales and the Fed’s beige book are . Friday will see both the release of EMU PMI and US ISM manufacturing and could be the key moment of the week. These data will show the way now for USD short-term.

EUR/USD (‘06): A clear break higher, with almost some panic in Asia this morning

Technically, a dollar negative sentiment was installed, as the pair moved back above the 1.2630-40 zone. Now the pair also broke above the year highs, confirming a euro positive picture ST.

Support is seen at 1.3110 (24 Nov high), at 1.3055 24 Nov intraday low) and at 1.30/1.2979 (psycho / old year high).

Resistance is seen at 1.3200 (figure resistance), at 1.3227 (22 Mar 05 high) and at 1.3264 (18 Mar 05 low).

Last week, the sterling had been helped by M&A talk of UK companies being taken over by EMU companies. Some of these stories haven’t been that new though and we wonder how much more impact they can continue to have; the market often reacts to such M&A stories with a bias of ‘buy the rumour, sell the fact’.

The fact hasn’t come true though for now, but still the market has incorporated a lot of this sort of news.

The euro is starting to fight back. This has come about in the aftermath of the strong IFO outcome of last Thursday.

We keep a buy-euro-on-dips attitude. The bottom at 0.67 should provide some solid support. We feel that the M&A stories should dwindle, while we bet on continued good eco news from the EMU for now.

The upside stood recently at the 0.68 zone, but a test should be possible; The EUR/GBP pair has not followed the cue of the EUR/USD pair at all over the past days/week and has some potential to catch up.

This morning, the sterling tried to gain on the solid Hometrack survey (prices up 5.3% Y/Y), but the impact faded fast enough.

EUR/GBP (30 days): testing the upside?

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 0.6754 (24 Nov lows), at 0.6742 (last week Nov low) and at 0.6734 (neckline double bottom).

Resistance comes in at 0.6784 (ST high) and at 0.6794 (Reaction high).

USD/JPY fell back lower during last Friday’s action. This fitted in nicely with general dollar softness witnessed almost across the curve. USD/JPY declined form the 116.40 zone to the 115.40 zone.

These lows provided a rebound platform though this morning. USD/JPY rose back up to the 116 area.

This morning, BoJ’s Fukui gave some additional comments. He reiterated that policy will raise rate gradually. This is interpreted as avoiding rapid tightening. That message has been already pretty clear to markets, having delayed a next rate hike to Q1 ‘07, after an initial step in July of this year.

He also indicates that the currency is a factor to watch. He said he was watching ‘estate prices, currencies along with economy in general’. The Japanese are much more alert to a rising yen than the Europeans to a rising EUR. That is also translated in FX crosses as EUR/JPY is hitting record highs…

Regarding USD/JPY trading, we continue to propose a sell-USD-intostrength approach. It is important in this respect though to confirm the break of the 116.50 zone. The pair could test this break during today’s action, as the USD tries to fight back this morning.

USD/JPY (30 days) USD negative while below 116.50 zone

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 the break below 116.50 indicates there’s more to come.

Support is seen at 115.57 (5 Sep previous low), at 115.38 (21 Aug low) and at 115.00 (figure support).

Resistance is seen at 116.33 (24 Nov intraday high), at 116.57 (neckline double top) and at 116.82 (recent top).