On Friday, EUR/USD showed some moderate intraday swings. The dollar tried to regain some ground against the single currency early in the session and dipped to below the 1.46 level, however the move could not be sustained and the pair returned to the mid 1.46 area to close the week. The data were of limited importance for trading. Weaker industrial production data and a very poor TIC data report with disappointing capital inflow in the US hardly left any traces on the graphs.
Today, the calendar is again rather thin with only the NAHB US housing market index on the calendar. At noon our time, Mr. Trichet will give a speech as Chairman of the BIS G20 meeting. However, one shouldn’t expect this to yield big surprises and official declarations most probably will be in line with the established G7 talk on currency issues.
Over the weekend, the weak dollar was also an item at the OPEC meeting. The debate only illustrates that at least part of the oil producing countries are very unhappy with their currency and their oil revenues linked to an ever declining US dollar. Any change in the currency policy of some of these currencies over time might be an additional negative for the US currency. However, short-term we wouldn’t give too much weight to the debate.
Longer-term, we think that more bad US news might be in store and that the dollar is not out of the woods yet. To herald a trend reversal we also wait for a clear technical sign and this isn’t available yet. So the longstanding up-trend in EUR/USD is not questioned.
In a short-term, day-to-day perspective, the EUR/USD pair last week entered some consolidation pattern with the 1.4750 area (topside) and the 1.4525 area (downside) the most obvious barriers. We expect these barriers to hold in the shortterm. The eco calendar for this week is rather thin and we don’t see a strong trigger available to force a major break for now. Some profit taking in US Treasuries resulting in slightly higher US bond yields might be a (mildly) supportive for the US currency. In this respect, the Fed Minutes of the previous meeting deserve some attention (Tuesday).
Also most yen cross rates shifted into a lower gear on Friday. USD/JPY on Friday morning revisited the 110 barrier. However no sustained break occurred and as stock market sentiment gradually turned somewhat less negative during the day, both EUR/JPY and USD/JPY showed some return action higher off from the intraday lows.
Asian stock markets this morning show somewhat of a mixed picture, but overall sentiment is not really excited, yet. As the yen is still seen as a good barometer for global investor sentiment and risk appetite, the Japanese currency this morning remained rather well bid. 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 sector will come back to haunt the markets.
In a day-to-day perspective, it will be interesting to see whether credit related tensions/ headlines might ease somewhat in the days to come. A rather thin eco calendar in the core countries opens some perspectives in this respect. Of course, credit linked headlines are not on a pre-scheduled calendar. If our working hypothesis for some calmer trading conditions going into the Thanksgiving holiday(s) in the US at the end of this week materializes, the downside in both USD/JPY and EUR/JPY might be somewhat better protected short term. As said, this doesn’t change our longstanding yen positive bias.
The sterling remained under downward pressure on Friday. After the ‘shocking’ news from the BOE inflation report and some disappointing eco data (retail sales) earlier last week, the rising tensions in the UK money market also was of no help for the sterling. EUR/GBP on Friday set a new (albeit minor) high in the 0.7170 area.
Overnight, the Rightmove House prices again came out very soft and according to the originator of the survey, more negative price developments might be in store. This of course is no support for the battered UK currency.
This week, the UK calendar is not that heavy, but indicators like the CBI Industrial trends survey (Tuesday) still deserve some attention. More negative headlines might keep the sterling under pressure.
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). On top of that, our economic scenario also envisages rate cuts in the Euro-zone area already in the first half of 2008. So, in this respect, the interest rate differential between the UK and the Euro-zone will continue to stay at decent levels for a while and at some point this should give the sterling some support.
However, short-term we wait for a technical sign that the sterling-storm is cooling down before reconsidering to buy back into sterling. EUR/GBP holding below the 0.7170 new highs for one or two days, could be a first sign that the sentiment is turning somewhat less sterling negative and that a correction might be in store.
