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Sunrise Market Commentary: Currencies

Euro stays under pressure

Wed, Feb 18 2009, 08:15 GMT
by KBC Market Research Desk

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On Tuesday, negative investor sentiment again dominated the price action on almost all markets. Signs of mounting stress in the European government bond markets, uncertainty on the debt and liquidity situation of the Central and Eastern European countries and the potential implications for the European banking sector all created euro negative environment. However, most of the EUR/USD losses were already on the screens after the Moody’s report on Central European banking, which was published in Asian trading. EUR/USD even tried to recoup some of the earlier losses on the back of a better than expected ZEW economic sentiment report. However, the optimism was very shot-lived. European and US stock markets remained under heavy pressure and EUR/USD finally slipped below the 1.26 mark. We have no intention to paint a euro positive picture but, given the level of global market stress and the negative headlines from Europe, the damage for the euro during the US and the European trading hours was not that excessive. EUR/USD closed the session at 1.2582, compared to 1.2801.

Overnight, the Rescue Plans for the US automobile sector and the additional losses on the Asian stock markets had not profound impact on EUR/USD trading.

Today, eco calendar contains the housing starts and the industrial production data. After the closing of the European markets Fed’s Bernanke will speak on the Fed’s lending programs. Among other things, markets will look out whether the Fed president announces the buying of US Treasuries by the Fed. If so, the market reaction of the currency markets is not that easy to predict, but from a fundamental point of view, this should be considered as dollar negative. However, safe haven considerations currently dominate the market and these are obviously dollar positive. Global market sentiment (including the euro negative market themes from the previous sessions) will continue to set the tone for EUR/USD trading.

Since the start of the year, EUR/USD was on the defensive. The deterioration of the European government finances and the widening intra-government spreads continue to weigh on the single currency. The euro also continues to be a pointer of global risk aversion. Negative headlines on the development of the credit crisis most often had a negative impact on the euro. The US eco story is also far from brilliant, but the dollar most often takes advantage from its safe haven status. Over the previous two weeks, the EUR/USD decline shifted into a lower gear but any attempts to change the trend immediately ran into resistance. The renewed flaring up of risk aversion and the market fear that the deepening of the crisis in Central and Eastern might cause an new adverse loop for the European economy and its financial sector caused EUR/USD drop below the 1.27 support area yesterday morning. The price action in EUR/USD is very much driven by global market sentiment and with major stock market indices close to key support levels, the outcome of this test will also be the key factor for EUR/USD trading. So, EUR/USD is expected to remain on the defensive as long as global market uncertainty persists.

From a technical point of view, the correction from mid December brought EUR/USD again in the previous sideways range (capped by the 1.3300 area). The pair tested several times the 1.2765/00 support area (previous low) and a break of this area succeeded yesterday morning. This raised the red alert for the single currency and opened to way for return action to the 1.2330 area (2008 low). A break below the 1.2330 area would signal big trouble for the single currency.

On Tuesday, price action in USD/JPY was again remarkable. USD/JPY declined rather sharply in Asia and at the start of trading in Europe. The pair set an intraday low in the 91.57 area. However, the yen could not hold on to its gains and despite the steep stock market losses the pair even regained all the early losses and closed the session at 92.41, compared to 91.73 on Monday.

Japanese stocks markets show additional losses this morning, but given the steep decline in the US yesterday evening, the damage is not really excessive. USD/JPY is holding near yesterday’s close. Tomorrow morning, the BOJ will publish the results of its policy meeting.

In China, officials denied press rumours that the yuan might weaken to USD/CNY 7 due to the worsening of the economic situation in China.

Looking at the charts, USD/JPY set a reaction low in the 87.15 area in December. Since then, the pair entered calmer waters. The long-term trend in the pair remains negative, but the downtrend tends to slow below 0.9000 (amongst others on fears Japanese officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8710/15 reaction low). Recently, the pair even tried to make a cautious rebound. The gains were not impressive, but we still have the impression that the underlying yen-momentum is not that strong anymore. Last week, we advocated that, if global market sentiment would become less risk averse, there might be room for a more pronounced rebound in USD/JPY and we installed a cautious buy-ondips approach. We have to admit that improved risk aversion at this stage is not really a good explanation for the USD/JPY rebound. USD strength probably is a better one. Nevertheless, the ST technical picture remains cautiously positive. A sustained break above the 92.42 resistance (previous high, currently still under test) opens to way for our MT 94.65 target.

The global euro negative sentiment also left its traces on EUR/GBP trading. Sterling still faced some headwinds at the start of trading in Europe. However, the EUR/GBP up-tick was short-lived. A higher-than-expected UK CPI release was a good excuse for a new EUR/GBP selling wave and the decline last throughout the trading session. EUR/GBP closed the session at 88.37 compared to 89.56 on Monday. BoE’s Besley in a speech indicated that the decline of sterling will likely provide some upward pressure on prices. The headlines had no impact on EUR/GBP trading.

Today, the UK calendar contains the CBI Industrial trends for February and the Minutes from the January meeting. However, after the inflation report published last week, we don’t expect the minutes to yield much additional new info fro the markets.

At the start of 2009, EUR/GBP made a forceful correction after the spectacular gains mid-December. EUR/GBP tried to recapture the longstanding uptrend, but the pair ran into resistance in the 0.95 area and another forceful correction even sent the pair (temporary) below the key 0.8840/00 neckline/support area. This was an important warning signal, but there was no sustained follow through price action. From a fundamental/ LT point of view, we remain sterling cautious. The BoE policy announcement on quantitative easing justifies this bias, we think. Ongoing pressure on the banking sector is no help for sterling either. Last week, EUR/GBP tested the high profile support (0.8663 area previous high) but the test was rejected and the pair rebounded above the 0.8840 Neckline. This rebound called off the short-term alert in EUR/GBP and makes the picture neutral again. Over the previous sessions we advocated that the EUR/GBP rebound lost momentum and that 0.9085/0.9130 could turn out to be a difficult hurdle short-term. The poor global euro sentiment currently weighs on EUR/GBP trading too.

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Published on  Wed, Feb 18 2009, 08:23 GMT

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