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Sunrise Market Commentary: Currencies

Euro relief short−lived

Tue, Jan 20 2009, 09:11 GMT
by KBC Market Research Desk

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On Monday, EUR/USD started trading in Europe in the 1.3300 area. For a brief moment, it looked as if the single currency would enter calmer waters after the cautiously positive close of stocks in the US and a constructive start of trading in Europe yesterday morning. However doubts persisted and throughout the session, a series of negative events/headlines brought the single currency again under pressure. The plan on the UK banking sector showed that the situation in the financial sector remains challenging, the EU commission came out with awful forecasts for EU growth in 2009 and 2010 (or to put it right: a deep contraction in 2009 instead of growth) and S&P cut the credit rating of Spain from AAA to AA+. Especially the two latest factors weighed on the euro and EUR/USD came under pressure in afternoon trading, even if the US was not in the market. The pair closed the session in the 1.3069 area and dropped below the psychological barrier of 1.30 in overnight trading.

Today, the eco data calendar in Europe contains the ZEW Economic sentiment. The market expects a very limited improvement and that might be possible (some regional indicators in the US also showed slightly better than expected readings recently). However, even in case of an improvement, it is highly doubtful that markets will give much weight to it. The problems in the European financial sector and the uncertainty on public finances and credit quality of the European governments probably will continue to dominate market sentiment. This is no help for the single currency. The global news headlines will of course be dominated by the inauguration of president Obama in the US. This won’t yield any concrete measures on how to address the financial and economic crisis. However, it might give the dollar some psychological support short-term.

At the start of the new year, EUR/USD showed an indecisive trading pattern However, the market gradually gave more weight to the negative news coming from the euro zone. The deterioration of the European government finances, pressure on the Sovereign credit ratings in Europe and the widening of intra-govie spreads became an ever more important factor for EUR/USD trading. This pattern was confirmed yesterday. The eco news headlines from the US are far from convincing either, but at least for now they were given less weight and were seen less negative for the dollar. The dollar has regained the advantage of the doubt over the euro, especially in times of rising global market pressure. Longer-term we remain skeptic on the chances for a protracted dollar rebound as the budgetary and monetary environment (quantitative easing) in the US is not really USD supportive either. However, shortterm, the sentiment obviously turns euro negative. Recently, we advocated keeping a close eye on the technical charts and overnight, EUR/USD dropped below a key technical support level. So, if confirmed we can draw our conclusions.

From a technical point of view, EUR/USD in December broke above the previous sideways trading pattern and an important downtrend line (cf. graph). This made the MT picture for EUR/USD positive. However, a forceful correction kicked in and EUR/USD dropped below the top of the previous sideways range (1.3300 area). This made the picture again neutral to short-term negative. There was some easing in the euro pressure at the end of last week, but EUR/USD failed to regain any important resistance. If the pair’s break below the 1.3025 area would be confirmed, it would open the way for more downside in the previous 1.3300/1.2330 trading range. So, we install tight stop-loss protection on ST EUR/USD long exposure.

On Monday, USD/JPY was rather well supported in Asian trading as stock markets tried to build on the (cautiously) positive closing on Friday evening in the US. However, sentiment turned again negative in Europe and the yen regained most of the Asian losses. However, activity was rather light with the US markets closed for Martin Luther King Day. USD/JPY closed the session at 90.64, little changed from the 90.72 close on Friday evening.

This morning, Japanese eco data (tertiary Industry index, Tokyo condominium sales, consumer confidence and Machine tool orders) all came out very weak, illustrating the spreading of the crisis throughout the Japanese economy. The BOJ allotted JPY1.2883 trillion in its special money market operation, a tool to support corporate financing.

Looking at the charts, global market stress and overall dollar weakness in the wake of the Fed’s announcement on quantitative monetary easing hammered USD/JPY and the pair set a reaction low in the 87.15 area on December 17. Since then, the pair entered calmer waters. The long-term trend in the pair remains negative, but recently we warned that the downtrend might slow below 0.9000 (among others as Japanese officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8715 reaction low).

Last week, we advocated at least partial profit taking on USD/JPY shorts in case of return action towards the 2008 lows and indicated that there could room for a ST correction/ rebound in USD/JPY. In a day-to day perspective this correction might slow as stock market are again under pressure this morning. However, we’re not really impressed by the yen performance, especially not against the dollar. So, we’re still in no hurry to already reinstall/add USD/JPY short exposure at the current level.

On Monday, the focus in the UK was on the government plans to support the banking sector and revive lending in order to restart the UK economy. However, the impact of the plans for sterling were ambiguous, to say the least. The plans will have a material impact on the UK public finances and the BoE facility to buy £ 50 bln assets brings the BoE again closer to policy of quantitative easing. The newsflow from the EU was far from inspiring, too, but this didn’t prevent sterling from losing ground against the single currency. EUR/GBP rebounded above the 0.90 barrier at the start of trading yesterday morning. The pair moved gradually higher throughout the session and closed the day at 0.9059, compared to 0.9003 on Friday. Overnight, sterling lost further ground as GBP/JPY selling filtered through in other GBP cross rates.

Today, UK inflation data are scheduled for release and BoE governor King gives a speech in Nottingham. A sharp decline in headline inflation won’t come as huge surprise, but might spur expectations for more bold BoE action (rate cuts and other easing measures).

On the technical charts, the break above a series of high profile resistance levels in November/December has made the long term technical picture outright positive for EUR/GBP. Since the start of 2009, EUR/GBP showed quite a forceful correction but in our view this move still didn’t change the long-term sterling negative picture yet and we consider the recent EUR/GBP decline as corrective in nature. Since Monday last week there are some tentative signs that the sterling rebound might be losing momentum and mid last week we reinstalled a cautious buy-on-dips approach. Yesterday’s market reaction to the UK banking plan could be an additional indication that sterling rebound against the euro has run its course. We hold on our guarded buy-on-dips approach in EUR/GBP. A drop below the 0.8841 ST reaction low would be a first warning. A sustained return below the previous high (0.8663) would question our long-standing sterling negative attitude.

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Published on  Tue, Jan 20 2009, 10:45 GMT

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