Even in thinned market conditions with the US closed yesterday and with also Japanese markets closed this morning, the dollar continued its “natural” trend that obviously is down, even in the absence of high profile (bad) news. Mr. Trichet yesterday evening repeated the established ECB mantra by saying that he is against abrupt and brutal swings in the exchange rate. At the same time, he again called for an acceleration in the pace of the appreciation of the yuan. The positioning for the EUChina summit from next week is gearing up.
Mr. Trichet’s warning on brutal swings didn’t impress the markets as EUR/USD this morning already made a next step higher to reach the 1.4965 area. The magic barrier of 1.50 now comes very close.
Over the previous months, complaints from European companies on the weak dollar in general were fairly modest. However, the declarations from the Airbus management yesterday that the current level of the dollar has gone beyond the pain barrier and that its rapid decline might be life-threatening for the company, suggest that we gradually enter another era.
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. Nevertheless, we will take a close look on the official ECB talk in the days and weeks to come to see whether they intend any more decisive action. However, at this stage we still don’t expect this to yield much market impact short term. Corrections on overextend conditions are always possible, but for now there is no reason to catch the USD falling knife. A drop below 1.4818 (ST low) could be a first indication that we might see some short-term consolidation/ profit taking. (Partial protection on longs).
Japanese markets are also closed today, but this is also no obstacle for USD/JPY to join the broader dollar sell-off. Yesterday, USD/JPY basically held a sideways trading pattern in the 109/108.50 area. However this morning, in thin market conditions, USD/JPY in a short time again lost more than one big figure. In essence, this is a dollar move rather than yen move, as the yen gains against the single currency were very limited.
From a technical point of view, the break below the key 108.95 neckline in USD/JPY now is clearly confirmed and this only can be considered as a strong positive sign for the yen in a longer term perspective.
However, despite our long-standing positive bias on the yen, from a short-term/timing point of view, we are a bit reluctant to jump on this move and add yen long exposure at the current levels. We suspect that the MoF will come out soon to warn than excessive prices swings in the yen are not warranted and that they will monitor the situation closely. Short-term this might at least temporary slow the ascent of the yen. We continue to look to sell USD/JPY into strength.
EUR/GBP continues to go higher, however, considering the massive gains in EUR/USD, this time the gains should be considered as rather moderate after all. Nevertheless, EUR/GBP this morning set a new high in the 0.7215 area.
Today, the UK calendar only contains some second tier releases, and we don’t expect them to have a material impact on trading. The details of the Q3 GDP nevertheless are interesting.
In a longer term view, one might still argue that a lot of sterling bad new is already priced in. Markets take already into account a decent possibility for three UK rate cuts in the first half of next year. On top of that, our interest rate scenario also envisages two ECB rate cuts during that period, something not priced in at this stage. However, currently the market perception/feeling obviously is that the ‘risk’ is for the Bank of England to act sooner and more aggressive if necessary. In this context it’s probably too early to try already to exploit the current sterling oversold conditions. In case of further global market tensions, a retest of the 0.7254 all time high (2003) in this pair might be in the cards. Bank of England to act sooner and more aggressive if necessary. In this context it’s probably too early to try already to exploit the current sterling oversold conditions. In case of further global market tensions, a retest of the 0.7254 all time high (2003) in this pair might be in the cards.
