Already at the start of trading yesterday morning, the dollar came under heavy pressure, especially against the single currency. At that time, we didn’t see much news behind the move. Rumours on an inter-meeting Fed rate cut didn’t convince us. In the market and the financial press there was still a lot of talk on oil producing countries considering loosening their currency links to the US currency. This morning for example, newspaper reports that Saudi Arabia may consider a revaluation of its currency against the dollar only added to this kind of dollar negative noise. Of course, if these countries indeed take action to reduce their dollar exposure, the single currency is the only viable option. Whatever the reason, the EUR/USD set new all-time highs during the European session.
The dollar remained under pressure throughout the whole day and the Fed Minutes didn’t bring any news to stop the dollar decline. The report showed that the October Fed rate cut was subject to quite some internal debate at that time. However, the downward revision of the 2008 growth forecast confirmed the markets’ view that more Fed easing will be in store, starting with an additional rate cut at the December meeting. So, also from that perspective, the way was open for more dollar losses. EUR/USD closed the day at around 1.4840, a gain of slightly less than 2 big figures compared the close on Monday!
Our standing view that the eco news will continue to be dollar negative and so the dollar remains under pressure obviously remains in place. Reinforced market hopes for additional Fed rate cuts after yesterday’s Minutes only add to this dollar negative feeling. The drop of the US 10-year government bond yield below its German counterpart is no support for the dollar either.
In a day-to-day perspective, we started this week with a more neutral bias as we thought that some short term consolidation might have been in store with the eco calendar rather thin and with a shortened trading week in the US. However, the 1.4750 range top was taken out without any hesitation, stopping out our short-term range trading call. After this new technical break higher, there is no reason to row against the tide.
Yesterday, the yen didn’t move that much, especially not against the dollar. A better stock market sentiment in Asia, Europe and even at the start of the US session led to some intraday yen weakness. USD/JPY revisited the mid 110-area and EUR/JPY even moved twice above the 163 barrier. However, in both cross rates, technically important resistance levels held and a renewed stock market jitters in Asia this morning helped the yen to some new gains. Especially, USD/JPY currently is at a key level. 108.96 is the 2006 low and a break below would paint a massive double top formation on the charts.
This morning, Japanese eco data were mixed, with a good trade performance but with the all industry activity index signaling quite a sharp loss of momentum.
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 come back to haunt the markets and support risk avers investor behaviour.
In a day-to-day perspective, yesterday, the yen performance was slightly disappointing, especially against the single currency. However, in USD/JPY the pressure is clearly mounting and a sustained break below the 108.95-area only would add to the downward pressures in this pair. We stay yen long.
After three days of consolidation, the EUR/GBP pair yesterday joined the broader euro move higher. Already during the morning session the pair went for a test of the highs in the 0.7170 area. A better than expected CBI industrial trends survey hardly brought any support for the sterling and later in the session another jump higher in EUR/USD forced EUR/GBP to a new year high, too.
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 continue to weigh on the UK currency. In this respect, we take a close look at the BOE minutes today.
Recently, we kept sidelined in the EUR/GBP pair and waited for a technical sign that the sterling-storm is cooling down. After yesterdays new break higher, this signal is now ever further away. So, also in this pair, the message is not to blow against the wind at this juncture.
