Yesterday, the EUR/USD currency pair showed some intraday swings but given the sharp moves in most other markets, the price action in this pair should be considered also rather limited after all.
The dollar tried to regain some ground during the morning session in Europe as it looked as if global markets might have entered some calmer waters at that time. However, (USD & global market) sentiment deteriorated again during the US trading session and EUR/USD revisited the intraday highs in the 1.4880 area late in the session. Overnight tensions calmed down somewhat. The USD 7.5 bln investment from an Abu Dhabi investment group in Citigroup in this respect might have played a role.
Today the calendar contains some interesting releases both in Europe (IFO, German inflation) and in the US (Housing prices, consumer confidence, Richmond Fed survey on Manufacturing). As usual, the European data probably will only have a limited impact on trading. The US data, especially if they were to come out very weak might again send some jitters through the markets. Also the visit from the EU/ECB officials to China will yield some headlines. However, we don’t expect this to be of key importance for EUR/USD trading.
Over the previous weeks, an ongoing stream of negative headlines from the US housing and mortgage market and its negative impact on the financial sector weighed on the US dollar. In a longer term perspective, the credit crisis probably is far some solved and new negative credit headlines probably won’t be good news for the dollar.
However, in a short-term perspective, the markets (stocks, bonds and also the dollar) probably have already priced in quite a lot of USD negative news and might be in for some consolidation. If no additional bad news comes to the forefront (yesterday’s events of course illustrate that everything is still possible in this respect), this might also help to unwind some overbought conditions in EUR/USD short-term.
So, we hold on to our short-term neutral bias for EUR/USD. The 1.4967-area should give some short-term protection on the upside. So, our longstanding view remains dollar negative and we look to buy back in this pair on more pronounced dips if they were to occur. Only a sustained break below the longstanding uptrend channel bottom (currently at 1.4610) would suggest that the short-term correction could go somewhat further. Of course, if renewed market tension would force the Fed to an intermeeting rate cut, this could also trigger another wave of dollar selling.
USD/JPY over the last 24 hours showed some sharp swings that mostly mirrored investor sentiment on global (stock markets). The pair yesterday morning started trading in the 108.60 area but the yen gradually gained momentum throughout the session as stock market sentiment plummeted and as investors were looking for a shelter. The pair dropped to the 107.25 area late in US trading. However, as the storm again clamed down in after-hours trading in the US and in Japan this morning, the yen almost entirely recouped yesterday’s losses this morning. On top of that BOJ’s Fukui this morning came out to say that the bank is looking at the risk of excessive moves in the financial markets and also said that the banks need to make efforts to keep market conditions orderly. A (soft) warning that the yen rebound goes too fast.
Last week, USD/JPY dropped below the key 108.95 area. From a technical point of view, this break below a neckline 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, we turned somewhat more cautious on the yen short-term at the end of last week. We are a bit reluctant to jump on this move and to add yen long exposure at the current levels. In case stocks enter calmer waters, this might also slow down the ascent of the yen short-term. So, we continue to watch out for a more pronounced correction in the yen cross rates. A return of USD/JPY to the 111-area, if it were to occur, in our view would be a good opportunity to add/reinstall yen long positions. A re-break above the 111.75 area would be a first warning signal that the short-term yen positive momentum is waning (stop loss).
EUR/GBP held a rather tight trading range despite the sharp gyrations in most other markets.
Longer-term the risk for proactive BOE action/interest rate cuts and more bad news form the UK housing sector contain the risk of more sterling losses over time. In such a scenario a test (or even break of the 2003 0.7254 top) are very well possible.
In line with EUR/USD and with the yen, we are also going into this week with a more cautious bias for the sterling short-term. The sterling was sold off in quite an aggressive way recently and some cooling of market tension might also help the sterling to unwind some of the oversold conditions. We look to buy EUR/GBP on dips). Today, there are no data on the UK calendar. However, speeches of BOE’s Blanchflower and BOE’s Sentance might yield some interesting headlines.
