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Sunrise Market Commentary: Currencies

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Major FX cross rates extend sideways trading patterns

Thu, May 15 2008, 07:52 GMT
by KBC Market Research Desk

KBC Bank

On Wednesday, the dollar started the session on a strong footing but EUR/USD found support in the 1.54 area on rumoured dollar selling from sovereigns. Later in the session, the US CPI data came out slightly lower/better than expected and this also blocked the potential for any further dollar gains against the euro at that time. EUR/USD closed the session at 1.5473, almost unchanged from Tuesday’s 1.5475.

Today, the calendar is heavily packed, both in the euro zone and in the US. In Europe the Q1 GDP and the CPI are on the calendar. In the US a long series of data are scheduled for release with, among others, the weekly jobless claims two manufacturing survey’s, the industrial production data and the TIC data.

The European Q1 GDP data probably will be quite strong, but are backward looking while the euro zone CPI should confirm the improvement to 3.3%. We don’t expect these data to be a lasting support for the single currency. Regarding the US data, it will be interesting to see the reaction on the currency markets in case of a deviation from consensus for one of the US activity data as the inflation theme was not really able to give EUR/USD trading a clear direction recently. We would be a bit surprised to see the dollar already running away with better than expected US activity data but it would be interesting to see that thesis confirmed later today.

Last week, EUR/USD gave a warning signal. The pair temporary dropped below the key 1.5340 area as markets grew more attentive to the recent deterioration in European eco data. However, this attack was rejected after the ECB press conference and EUR/USD currently trades again above the previous range bottom at 1.5340. This suggests, that at least for now the consolidation hypothesis can be maintained. The euro has lost some of its shine recently, but the question is whether the US data are already strong enough for the dollar to stage a more powerful rebound. In this respect, today’s US eco data, even if they are not the most important ones, already could give some insight in the markets’ assessment. Recent signs that the Fed will be on hold for a prolonged period of time (confirmed by Fed speakers yesterday/overnight) were/are not yet enough to trigger a sustained dollar rebound. For now we hold on to our view that there is no dominant market theme to guide trading in this pair and we expect some more sideways, probably often even erratic trading, as the picture on both side of the Atlantic probably is not strong enough to trigger a clear directional move. In a short-term perspective, it looks as if the 1.56 area won’t be that easy to break. So we expect more sideways trading in the 1.5285/1.5600 area. In a day-to-day perspective, we still put the risk for EUR/USD to drift somewhat lower in this range.

Yesterday, the trading pattern in USD/JPY was somewhat different than USD/EUR. The dollar was also well bid in Asia and early in European trading. Later, the US CPI data triggered some erratic swings. Immediately after the release, USD/JPY spiked lower, but this move was soon reversed as stock markets showed a strong start in the US on the US CPI report. USD/JPY gave up some gains later in the session as US stocks had to give up most of those gains in the last hour of the session. USD/JPY closed the day at 105.04, still slightly higher compared to the 104.75 close on Tuesday.

This morning, Asian (and even more Japanese stocks) trade in positive territory but at this stage this has only limited impact on yen trading. Japanese machine order data came out very weak at (-8.3% M/M and -6.2% Y/Y).

Elsewhere in the region, the kiwi dollar continues to fight an uphill battle as economic data continue to point to a rather sharp slowdown (this morning the retail sales disappointed).

Later today, the US Treasury is expected to publish its semi-annual report on currency policies of its main trading partners. As usual, markets will take a close look on the wordings regarding China’s currency policy.

Since mid March, USD/JPY became better protected as improving stock market sentiment caused a gradually unwinding of yen long positions. However, this pattern of gradual USD/JPY gains showed some cracks last week as global stock market indices (e.g. the S&P) did run into resistance. Stocks remain an important driver for this pair but the picture on the stock markets is still far from clear with the S&P still struggling to regain the key 1406 area in a sustainable way. Last week, we turned more neutral on USD/JPY and indicated that a break above the range top in the 105.62/69 area wouldn’t be that easy short-term. We hold on to this approach even if the downside in this pair looks well protected. We expect more range trading in the 102.60/105.70 trading range. A break above 105.70 would suggest that another upleg in this pair could be in the making.

Yesterday, EUR/GBP opened weaker in line with EUR/USD but already rebounded in the run-up to the BOE inflation report. This report confirmed the policy dilemma the BOE is facing. On the one hand, growth is slowing rather sharply while on the other hand inflation continues to stay high. As inflation is unlikely to return to the BOE target if the Bank were to apply the rate path that was discounted in the markets, this obviously indicates that the room for BOE interest rate cuts has become limited. However, in line with the price action after the publication of the inflation data earlier this weak, this policy deadlock, even if it leads to higher short-term UK interest rates, was no help for the sterling. EUR/GBP closed the session at 0.7952 compared to 0.7955 on Tuesday.

Today, UK calendar is empty

Mid April we picked up the technical signal of EUR/GBP dropping below a medium term uptrend line and saw this as a window of opportunity for sterling to enter calmer waters or even for a correction. However, the sterling rebound did run into resistance on poor UK data recently. From a fundamental point of view, we remain skeptical on the long-term rebound potential of the sterling as we expect UK economic data to remain weak in the foreseeable future. So, any further downside in this pair should come from global euro weakness, rather than from sterling strength, but also the downside in EUR/USD still looks reasonably well protected now. We continue to see the downside in this pair well protected. The break above the short-term flag top last week is confirmed and puts the risk for some additional upside in this pair short term.

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Published on  Thu, May 15 2008, 07:59 GMT