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Sunrise Market Commentary: Currencies

What risk aversion?

Wed, Nov 14 2007, 08:18 GMT
by KBC Market Research Desk

KBC Bank  |  View company's profile

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The EUR/USD pair rebounded yesterday from the 1.4560 zone to the 1.46 zone. This morning the rebound continued to the 1.4650 area. The correction in this pair has been halted and reversed clearly.

Not that the eco data helped the single currency. The German ZEW economic sentiment survey was poorer than expected, dropped further to -32.5 in November from -18.1 in October, and thus reaching the lowest level since early 1993!

Now is time for the dollar bears to show their resolve. Has the correction gone far enough or has this been a trend reversal? That is still the question. Dollar bears are trying to push the pair back up to the highs. We wonder whether they can succeed. Since this high, the EMU policy makers have become more opposed against a strong euro and sounded much more united in this issue. We feel this could hold back the pair medium term.

Especially Trichet’s comments, as he labelled the euro rise as ‘abrupt’ and said ‘brutal moves are not welcome, are a serious matter to keep in mind going forward. In November 2004 he made similar comments. EUR/USD went on to set new highs, but it was a predictor of a sharp correction to come from January 2005 onwards…

Today, the calendar should make traders focus on the US data, with PPI and retail sales. These should offer guidance.

During yesterday’s session, USD/JPY rebounded from below the 110 mark to the 111 area.

US stocks made an impressive comeback (S&P 500 + 2.9%) and this was a drag on the yen, as it was the signal for the resurgence of carry trades. The Nikkei confirmed this return to stocks this morning as it also rebounded. This is a less yen supportive environment, so the yen has to take a step back. This morning, the pair reached the 111.30 zone.

The yen’s rise was also capped short-term by comments of Japan’s PM Fukuda pointing out that the yen was appreciating ‘too fast’ in the short-term.

Going forward, we feel the market is already very much yen negative in its positioning, so any sign of risk aversion will trigger sharp yen gains, as we’ve witnessed in the past week. The equity market still has to convince us by breaking above looming resistance (for S&P 500 at. 1497).

We feel the yen looks a good investment on dips and for the longer term. The uncertainty and continued fall-out from the subprime sector will come back to haunt the markets. That is why we keep the bias for a yen buy-on-dip-scenario longer term.

Today, attention should return to the USD side of the cross, with the US PPI ad retail sales on the agenda.

EUR/GBP dipped slightly yesterday, ticking down from the 0.7070 area to the 0.7050 zone.

UK CPI rose by a slightly firmer-than-expected 2.1% Y/Y in October. Core inflation on the other hand stabilized at 1.5% Y/Y. This means that it could be interpreted as mixed news, used by both the hawkish and dovish fractions of the MPC, so the outlook remains very much uncertain regarding BoE policy going forward.

Today is a big day for the UK with the BoE quarterly inflation report and data on payrolls.

We looked for sideways trading between the 0.6890 and 0.7030 zones last week. The move above 0.7030 has made us stop-loss out of sterling long positions, set up at the 0.70 zone. We now stand sidelined.

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Published on  Wed, Nov 14 2007, 09:41 GMT

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