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Sunrise Market Commentary: Currencies

Euro remains under pressure

Mon, Feb 2 2009, 08:36 GMT
by KBC Market Research Desk

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On Friday, EUR/USD extended its decline. The slide on the European stock market, a steeper than expected decline in the European CPI and Moody’s putting the AAA rating of Ireland on negative outlook, all were enough reasons for investors to further off-load the single currency. The US data were mixed to weaker-than-expected but were no lasting support for the single currency. EUR/USD closed the session at 1.2813, compared to 1.2954 on Thursday.

This week some key European and US data will be published and the ECB will decide on Interest rates. In the context of the growing nervousness between the US and China with respect to the Chinese currency policy, the US refunding announcement deserves some more attention than usual, even if we have to admit that (contrary to Europe) the debate on the funding of the US government recently hasn’t been a factor of importance for EUR/USD trading.

Today, the US calendar contains the spending and income data but, probably even more important, the ISM manufacturing survey for the Month of January. In Europe, the final PMI data are scheduled for release. Recently, the link between macro data (both from the US and from Europe) and currencies was not always that straightforward. However, negative news, from whatever source, recently most often was a reason to fuel the reigning euro skeptic sentiment. The poor start on the (Asian) stock markets this morning suggests again a difficult start for the euro against the dollar.

Since the start of the year, the currency market gradually gave more weight to negative news from the euro zone. The deterioration of the European government finances, pressure on the Sovereign credit ratings and the widening of intragovernment spreads continue to weigh on the single currency. The dollar has regained the advantage of doubt over the euro, especially in times of rising global market pressure. Early last week, there was a temporary easing in the EUR/USD decline. However, the rebound lacked upside momentum and EUR/USD currently sets new reaction lows. The underlying debate on euro sustainability (cf. intra-EU government bonds spreads) and global investor/stock market sentiment will continue to be important drivers for euro sentiment. The uncertainty ahead of this week’s ECB meeting (after the much lower than expected CPI) might be an additional negative factor for the euro. Longer-term, we’re not convinced that the dollar should perform a sustained rally against the euro from the current levels. However, for now we can only take notice of the euro skeptic market sentiment. There is no reason to try to fight the established downtrend.

From a technical point of view, the correction from mid December brought EUR/USD back in the previous sideways range (capped by the 1.3300 area). The break above ST downtrend channel (cf. graph) was a short-term positive sign, but there was no follow through price action, which was very disappointing from euro point of view. At the end of last week, we turned neutral on EUR/USD. At the start of this new trading week, the pair is extensively testing the 1.2765 support area (previous low). This is an additional negative sign short-term (ST stop-loss). A sustained drop below this area opens the way for return action to the1.2330 area (2008 low). A sustained rebound beyond the 1.3172 area (Boll midline) is needed to improve the ST EUR/USD picture.

On Friday, USD/JPY continued the indecisive trading pattern from the previous sessions. The pair showed some intraday volatility. It reached an intraday low in the 89.20 area at the start of trading in Europe but the pair recouped the Asian losses later in the session (despite the struggling stock markets). USD.JPY closed the session at 89.92, little changed from the 90.03

This morning, the Japanese January vehicle sales showed a 27.9 Y/Y drop. The Nikkei extends Friday’s decline and closed today’s session down 1.5%.

Over the weekend, there were again quite some headlines on Chinese-US policy debate to resolve the (trade) imbalances between the two countries and on what this would imply for the value of the dollar and the Chinese yuan. However, for now, there are no indications that the gradual approach from the Chinese authorities will be changed anytime soon.

Looking at the charts, USD/JPY set a reaction low in the 87.15 area on December 17. Since then, the pair entered calmer waters, but last week the pair retested the lows. 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 0.8710/15 reaction low). Over the previous two weeks, USD/JPY showed a lacklustre trading pattern. Intervention fears apparently ‘paralyse’ the long standing yen-strengthening trend. We remain yen positive longer term but don’t add/reinstall yen long exposure at the current level. We keep a wait and see approach and look for a more pronounced up-tick (caused by interventions or by something else) to reinstall/add USD/JPY short exposure.

On Friday, sterling extended its rebound against the euro. The move accelerated, even if there were no key eco UK eco data on the calendar. The overall euro-skeptic sentiment probably was the main driver for the EUR/GBP decline. However, the decent performance of cable suggests an improvement in sterling sentiment too. Despite the debate on (the implementation of) quantitative easing in the UK, some investors apparently have come to the conclusion that already quite some negative news has been priced in for sterling. So, there was not really one specific factor to explain the sterling rebound on Friday. Nevertheless, EUR/GBP tested/test the key 88.40 area. The pair closed Friday’s session at 0.8812 compared to 90.55 on Thursday.

Today, the UK calendar contains the PMI for the manufacturing sector. Later this week, all eyes will be on the BOE interest rate decision. The Bank is widely expected to cut its base rate to 1%. However, the question will be on the next steps as soon as ‘conventional’ policy steps are exhausted.

On the technical charts, the break above a series of high profile resistance levels in November/December has made the long term technical picture positive for EUR/GBP. At the start of 2009, EUR/GBP made a forceful correction. EUR/GBP tried to resume the longstanding uptrend, but the pair ran into resistance in the 0.95 area. This lower high on the charts pulled the trigger for another forceful correction and the pair currently tests the key 0.8840 support area. From fundamental point of view, we remain sterling skeptic (a deficit country in an environment that moves towards quantitative easing, ongoing uncertainty on the key banking sector, no clear signs of improvement in the housing market…). However, as is the case for EUR/USD, euro negative factors apparently are considered at least evenly important by the markets. On top of that, in a tactical approach we always keep a close eye on the technical charts. The test of the key 0.8840 area raises the red alert for our short-term positive bias in EUR/GBP. The jury is still out, but tight stop-loss protection on EUR/GBP long positions is warranted. A sustained break below the 0.8840/88.00 area would open de way for a more pronounced correction. The first high-profile next support is 0.8661 (previous high).

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Published on  Mon, Feb 2 2009, 12:22 GMT

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