• Home ::
• Fundamental ::
• Market View ::
• Sunrise Market Commentary: Currencies

• Send
• Print
• Add To
• Rss

Sunrise Market Commentary: Currencies

f5e51178-81d4-4c85-ac66-585b44468391

0

0

USD disappoints friends and foes

Mon, Jul 9 2007, 14:44 GMT
by KBC Market Research Desk

KBC Bank

• US Treasuries down for third session in a row
• European yields close in to the recent highs
• USD disappoints friends and foes
• Earnings season to spark another positive surprise?

Global overview: Earnings season to spark another positive surprise?

Last Friday’s US payrolls release concluded the important first week of the month. The conclusion after the key eco data published in the major economies is that, at least at this stage, policymakers including the Fed and the ECB succeed very well in their attempts to steer the economy to some kind of soft landing scenario. In general, the economy seems well on track to maintain a decent level of growth without causing too many (demand-driven) inflationary pressures. However, for markets this equilibrium is never guaranteed for a prolonged period of time and with interest rates creeping higher again, the uncertainty seen during most of last month probably will resurface at some point in the weeks to come.

On the markets, the inability of the dollar to regain ground against the single currency remains striking, even after quite a series of good US eco data. Good news or bad news, everything is still a reason for the yen to weaken further. In the interest rate markets, yields gradually move back up coming close to the highs registered earlier last month. With no important eco data on the calendar it will be interesting to see whether these technically important levels on the interest rate markets will do their job.

However, the attention now shifts to the (US) earnings season, with Alcoa’s earnings to be published after the closing today still the official start to the earnings’ season. Question is whether the improvement in the macro data throughout the second quarter will also be translated into a good earnings season. The odds aren’t that bad. The number of profit warnings is reasonably low compared to the same quarter last year, while the expected earnings growth in general is not that high. Of course, the outcome of the data is one factor; the market reaction is always something different. In this respect, it will be interesting the see whether strong earnings, if there were to occur, will be able to overcome the hurdle of higher interest rates as they managed to do several times before over the previous years. The technical picture will have an important say in this debate, with a lot of indices trading very close to key levels.

Currencies: USD disappoints friends and foes

The EUR/USD pair ticked slightly higher on Friday, closing up from the 1.36 zone at the 1.3620 area. This came despite upbeat US data and is worrying as such for the Greenback.

The market awaited the outcome of the US payrolls. The outcome was a bit of a wildcard, with contradictory signals throughout the week. The actual outcome was comforting though with a growth of 132K for June and the April and May figures were actually revised higher. Good news for the dollar one would think, but the truth was that the Greenback could not gain on the release.

We don’t feel more dollar softness would be warranted if the US data continue to show an economic recovery. Still, the present dollar performance cannot be labeled any differently than a disappointment. The dollar should have gained over the course of last week, judging by all the positive eco news, including also 2 ISM reports. This hasn’t been the case.

Some disappointment showed on Friday: after the good enough payrolls report, the dollar couldn’t gain and new dollar sellers tried to push it the other way of course: what can’t go up, must come down, speculators thought about the USD. This helped push EUR/USD from the 1.36 area to the 1.3620 zone.

This week the data are back-loaded, with the US trade balance on Thursday and retail sales on Friday. This would suggest some range trading until then, capped by the year highs at the 1.3680 zone.

Over the past week, the USD/JPY pair had a fabulous week erasing all the recent yen gains. The pair popped up from the low 122 to the mid 123’s.

Everybody has forgotten everything about the yen revival of last week, with the safe haven theme at that time. Now everybody is seeing good data in the US and the EMU, and the carry trade theme is again the overriding principle to guide the market thinking. In this sentiment, it is obvious that the logical choice for USD/JPY and EUR/JPY is to the upside.

EUR/JPY thus gradually rose to fresh record highs at the 168 zone on Friday and seems to be deepening this move this morning. The process is ongoing and continues it would seem. USD/JPY is gradually rising from the 123 zone to the mid 123’s. This morning the pair seems to be sticking to this direction reaching the 123.60 zone.

There doesn’t seem to be a reversal signal available for the yen. The BoJ is not coming to the rescue, markets are wondering about deflation, while other economic areas are showing strength. Also, there is only very limited commotion about the weakness of the yen. This is very strange. The French policy makers over the past week also only lashed out against dollar and yuan, not the yen. This week’s EcoFin meeting may shed some more light on the situation. French President Sarkozy and his ministers will elaborate their point of view most likely over the coming days.

The US is still focusing on China, with now also Secretary Rice targeting the weak yuan for criticism. This is not having an impact on USD/Asia. It is seen as really limited to the USD/CNY pair and that is ultimately a Chinese choice to manage this FX rate.

EUR/GBP rose slightly from the 0.6760 zone to the 0.6778 zone last Friday. This morning the pair eased slightly to the 0.6770 zone. The post-BoE/ECB environment hasn’t been too kind on the sterling, with some losses recorded since Thursday.

German factory orders rebounded in May rising 3.2% M/M and 7.5% Y/Y. The German industrial sector is still doing very well. In the UK, manufacturing production increased by 0.3% M/M and 1% Y/Y in May. Data suggest the two currency areas are still going strong.

Now the pair is testing the neckline of a triple bottom formation at 0.6780. A break above would signal more sterling losses short-term. As long this is not the case though we are somewhat more sterling favourable, believing such a break would be difficult without any fresh news. There are some UK data scheduled this week with the PPI today and the trade balance tomorrow.

In a longer-term view, we keep a buy-sterling-on-dips bias, as we see a wide rate differential remaining in place in favour of the sterling. The strong UK data, rising house prices and BoE statement itself suggest the BoE is not done either and should respond to potential ECB rate hikes.

Download Full Sunrise Market Commentary: Currencies

Published on  Mon, Jul 9 2007, 14:51 GMT