HIGHLIGHTS

  • Bond Markets:
    • US Treasuries recoup early losses on stock market sell-off
    • European bonds fail to build out gains on euro strength
  • Currencies: 1.40 is the line in the sand
  • News: Busy eco calendar with Fed speakers catching the eye

CURRENCIES: 1.40 is the line in the sand

After all the commotion in the forex markets seen over the last days of past week all eyes were now locked on the EUR/USD pair on Monday. The pair however didn’t go on in its upmove and preferred to consolidate.

Indeed, EUR/USD fell back slightly at first. The Asian panic, which brought the pair to the 1.3180 zone was quickly digested. During early European hours, the pair fell back to the 1.312 area. But the correction didn’t go any further.

The market doesn’t yet see any valid reason to completely unwind the recent gains. The move above 1.30 now is being confirmed and highlights the risk of EUR/USD moving higher still. Many market players will still be looking to jump the bandwagon and will buy into euro on dips. That is why we also continue with this strategy.

One of the reasons is that the EMU policy makers still do not form a united front to halt the euro. Far from that even. French Minister Breton held up the official French stance of already wanting to halt the euro rise, calling for ‘collective vigilance’, but other EMU ministers aren’t ready for such talk. Luxembourg’s Juncker, chairman of the Fin- Min meeting, said that ‘excessive volatility and disorderly movements in exchange rates are undesirable for economic growth’, a neutral repeat of the G7 statements of the past. Austrian Grasser made his point clearly: ‘we can live with current exchange rate’ and Juncker even said the euro was ‘still lengths away from the critical zone’. Italy’s Padoa-Schioppa said ‘the euro has been even stronger in the past’.

All of this and German comments over the weekend (see yesterday’s Sunrise) indicate that breaking the record highs and really heading for the 1.40 zone would be the bridge too far. The IMF overnight confirms our view, saying that the euro is still in a range that the IMF considers fair value. If the euro went to the 1.40 to 1.50 range, this would be heading to overvalued.

EUR/USD (4 days): Confirming the break

Technically, a dollar negative sentiment was installed with the move outside the sideways range and above 1.2979.

Support is seen at 1.3113 (daily envelope), at 1.3085 (yesterday low), at 1.3046 (STMA) and at 1.2997 (ST breakup).

Resistance is seen at 1.3147 (today’s high), at 1.3172 (new year high), at 1.3197(daily projection band top) and at 1.3261 (daily triangle break target).

M&A talk continues to be a topic for sterling. Now people are rumouring that the Iberdrola bid on Scottish Power will be announced shortly. Still, the market has been anticipating on this bid for a while now that we only expect a very temporary reaction, a small dip in EUR/GBP only intraday and then some ‘buy the rumour, sell the news’ profit taking.

There is other news on the wires though as well, with a rumour that the Saudis would cancel their 10 B £ order for the UK’s BAE Systems ‘eurofighter’ and would instead switch to France’s ‘Rafale’ from Dassault. That would a positive development for EUR/GBP and should keep it well bid.

We continue on a buy-euro-on-dip sentiment intraday.

Also longer–term the impression is there that the euro has laid down a nice bottom at the 0.67 area for now; the upcoming rate hike of the ECB next week should also provide some support especially as we could be hearing some hawkish comments form the bank underpinning rate hike hopes for ’07.

Today, the euro zone M3 numbers are up for release. These normally do not have an impact on FX. If they would be significantly higher than expected, then some intraday euro strength should develop.

EUR/GBP (30 days): still more testing of the upside at this stage

Recently, the EUR/GBP pair was well captured in the narrow 0.67-to-0.68 range. A break above the latter would signal a return to the longer standing 0.67-to0.70 ranges.

Support stands at 0.6769 (daily envelope + STMA), at 0.6761 (yesterday low + MT MA) and at 0.6752 (week low).

Resistance comes in at 0.6786 (ST high) and at 0.6794 (reaction high) ahead of 0.6801 (38% retracement).

USD/JPY rebounded yesterday after the break below the 116.50 neckline of a double top last week and the subsequent drop to the mid 115 area. The pair picked up altitude again moving up to the 116 area, where it is still at this morning.

This morning, the Japanese retail sales only came in near consensus and couldn’t take away concerns of weak personal consumption. This is yet another signal that a December rate hike should be off the table.

BoJ’s Fukui has not given signals of an imminent rate hike. He has however not completely abolished rate hiking either, as some hoped. He said this morning that rate hikes should ‘not come too early but neither too late’.

That means in our view that Q1 ’07 should be the appropriate time, otherwise, his ‘gradual’ rate hike talk would be worth nothing as well, having seen a first (and only!) rate hike, which at that time would be some 9 months ago (July ’06). That’s no longer ‘gradual’. That would qualify as ‘one-off’ or ‘choking’ rate hikes if you would ask us.

And the hope for rate hikes needs to be kept alive for the yen.

But clearly the yen isn’t going that strong. The USD/JPY pair has broken below the 116.50 zone. This is in theory a dollar negative/yen positive sign. But there has been no follow-through and now the pair has to prove first that it can stay under this breakline.

Today, the US eco data take again the driver’s seat most likely, with durable, consumer confidence and existing home sales. There’s also a speech of Bernanke later today. There is growing concern that he may highlight slowing US economy as he speaks to Italian American business leaders. That would be a dollar negative potential event.

USD/JPY (30 days) Can USD/JPY stay below the 116.50 neckline?

USD/JPY slipped recently from the year highs, falling below the neckline of a double top at 116.50. as long as we’re below, this sis a dollar negative picture, but the pair is still near the crossroads at this juncture.

Support is seen at 115.90 (today low), at 115.37 (week low) and at 114.87 (daily Starc bottom).

Resistance is seen at 116.18 (STMA), at 116.39 (yesterday high) and at 116.57 (neckline double top).