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Sunrise Market Commentary: Currencies

A new day, a new high for EUR/USD

Thu, Nov 22 2007, 08:08 GMT
by KBC Market Research Desk

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EUR/USD continued its uptrend yesterday, even if the gains were less pronounced compared to the sharp spike higher on Tuesday. There was a brief, EUR/JPYrelated, intermezzo during the morning session in Europe, but as soon as US traders got involved, the dollar got another hit and EUR/USD set a new high in the 1.4870 area at the US close and this was revisited this morning. Growing uncertainty on the impact of the credit crisis on the US economy, expectations for aggressive Fed rate cuts going forward and an ugly US stock market performance yesterday were enough to give the dollar another hit. The eco data were only second tier and had no impact on trading.

Today, the US markets are closed in observance of Thanksgiving while the European calendar only contains a Non-policy ECB meeting and some ECB speakers. Of course, the market will pay close attention to the assessment of the ECB on the recent developments, including the strong rise of the (trade weighted euro).

Our standing view is that the eco and interest rate news will continue to be dollar negative. The dollar losses are already quite spectacular, but, at this stage we don’t see a trigger to change the course of events, neither from a fundamental point of view nor from a technical perspective.

The long standing trend in this pair is more than obvious up. However, this doesn’t mean the EUR/USD pair has to gain a full big figure every day. Thin market conditions always can cause some erratic sharp swings, but our best guess for today and tomorrow is that the single currency is in for some consolidation of the recent sharp up-move.

Yesterday, the yen started the day on a strong footing as global investors again were desperately in search of a shelter. At first it looked as if the key 108.95 barrier would be hit/broken without any hesitation, but later in the session, despite the poor US stock market performance, the yen rebound ran out of steam in the mid 108-area and a less negative stock market sentiment in Asia even helped USD/JPY to recover some of the recent losses and the pair currently is again at the key 108.95 level. In the mean time, from a EUR/JPY perspective, the yen performance is still slightly disappointing, we find. While the global environment in theory was still highly yen supportive over the previous days, the overall performance of the Japanese currency was really spectacular,

In a longer term perspective, we hold on to our yen positive bias and continue to advocate a buy the yen on dips strategy as the uncertainty and continued fall-out from the sub-prime crisis will continue to haunt the markets and support risk avers investor behaviour.

In a day-to-day perspective, some temporary slowing of the stock market sell-off also could hamper the yen rebound short-term. However, we continue to see more pronounced up-ticks in both USD/JPY and EUR/JPY as an opportunity to (re)install yen long positions. In this respect the USD/JPY picture looks slightly more favourable to go yen long, compared to EUR/JPY. Also for the yen, we watch for Japanese officials warning calls. At least for now, the amount of verbal interventions to slow the yen rebound was remarkably low.

Yesterday EUR/GBP extended its break higher. The Minutes of the previous meeting were balanced (vote 7/2 to hold rates unchanged) but the developments since the previous meeting should be enough for the BOE to cut rates. Together with broader euro strength, this helped EUR/GBP to extend its break higher with the pair setting new short-term highs in the 0.7210 area.

From a fundamental point of view, we think that already a lot of sterling negative news is priced in (both in the money market and in the currency market). However, ongoing negative headlines from the UK financial sector and growing speculation that the BOE will be forced to take decisive action soon (and much sooner than the ECB) continue to weigh on the UK currency.

Recently, we kept sidelined in the EUR/GBP pair and waited for a technical sign that the sterling-storm is cooling down. After the recent new break higher, this signal is now ever further away. So, also in this pair, the message remains not to blow against the wind at this juncture. The 0.7254 2003 high now becomes an obvious target in this pair.

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Published on  Thu, Nov 22 2007, 08:12 GMT

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