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Sunrise Market Commentary: Currencies

EUR/USD rebounds despite global market uncertainty

Mon, Feb 23 2009, 08:32 GMT
by KBC Market Research Desk

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On Friday, global markets showed again a very high degree of uncertainty and risk aversion. The ongoing flood of negative corporate and macro economic news weighed on investor sentiment. However, this time the impact on the currency market was rather limited. EUR/USD was traded in the 1.2570 area at the start of trading in Europe. The pair even tried to regain some ground during the morning session despite poor euro-zone PMI data. The pair set a new (minor) intraday low in the EUR/USD 1.2530 area at the start of US trading. At that time, stock market futures came under ever more pressure as markets pondered the probably of the nationalization of some major US banks. However, given the losses on the stock markets, the impact on EUR/USD was rather limited. After the close of the European markets, a short squeeze even triggered quite an impressive rebound in EUR/USD. This move was supported later in the session by declarations from the Obama administration that it doesn’t intend a (full) nationalization of US banks. These declarations eased the pressure on global stock markets and also helped EUR/USD to close the session at 1.2826, quite a decent gain compared to the 1.2674 close on Thursday.

Today, the eco calendar is very thin on both sides of the Atlantic. So, global investor sentiment and headlines on the fate of the (US) financial sector will continue to set the tone for trading on the currency markets.

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 fuelled a euro-negative sentiment. On top of that, the euro remained a pointer of global risk aversion. Negative headlines on the development of the global crisis often had a negative impact on the euro. The US eco story is also far from brilliant, but the dollar continued to take advantage from its safe haven status. Since mid January, 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 market fear that the deepening of the crisis in Central and Eastern Europe might cause a new adverse loop for the European economy and its financial sector caused EUR/USD to drop below the 1.27 support area. The price action in EUR/USD is very much driven by global market sentiment and with major stock market indices still close to key support levels (we especially look at the S&P 500), the outcome of this test will also be the key factor for EUR/USD trading. In this context, we look out whether stock markets (today) will be able to move away from this key support area. If so, this might also ease pressure on the single currency. It is still very premature, but as both USD/JPY and USD/EUR are quite a bit lower compared to the European close on Friday, we also watch out on any signals that the market would become a bit less USD positive. We have to admit that, for now, this is nothing more than a hypothesis.

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 the break of this area deteriorated the picture for the single currency and brought the 1.2330 area again in the picture (2008 low). A break below the 1.2330 area would signal big trouble for the single currency. In a day-to-day perspective, the EUR/USD rebound on Friday and this morning called off the short-term alert in the pair. However, confirmation on this is highly needed as recent EUR/USD attempts to reverse the established downtrend were very short-lived. Sustained return action above the 1.31 area could be an indication of an improvement in EUR/USD sentiment short-term. Nevertheless, we have the impression that the downside in EUR/USD has become a bit better protected.

On Friday, USD/JPY basically held a sideways trading pattern for most of the session. The pair temporary dipped below the 94 area early in European trading, but the dollar remained well bid later in the session. A global USD profit taking move hammered the pair after the European close and the USD/JPY currency pair closed the session at 93.35, compared to 94.20. The least one can say is that the link between the yen and risk aversion has become ever less evident.

This morning, Asian stock markets show a mixed picture. The Japanese indices show moderate losses. Chinese stock markets extend their rebound. However, the easing in global market tension doesn’t prevent the yen from posting further gains at the start of the new trading week.

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 ran out of steam below 0.9000 area (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 made a gradual rebound. The gains are not impressive, but the underlying yen-momentum obviously has weakened. This time, the yen decline was not driven by improved market risk appetite, but by rising worries on the Japanese economy. Last week, we had a cautious buy-on-dip approach in this pair. On Friday, the pair came close our first shortterm target (target 94.65, reaction high 94.38) and the nearing of this high profile resistance at least temporary slowed the recent up-move. In a day-day perspective, we turn more neutral and look out whether Friday’s correction has strong legs.

On Friday, EUR/GBP showed again some intraday swings, but was not bale to develop a clear directional trend. Early in the session, the pair remained under pressure due to global euro weakness. The better than expected UK retail sales was a sterling supportive factor, too. EUR/GBP reached intraday lows in the 0.8800 at the start of US trading. However, the global euro rebound late in the session also caused EUR/GBP the reverse the early gains. EUR/GBP close the session at 0.8891, compared to 0.8866 on Thursday.

Today, the UK calendar is empty.

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 rebound 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. Last week, EUR/GBP tested the high profile support (0.8663 area previous high) but the test was rejected. The subsequent rebound called off the short-term alert in EUR/GBP and makes the picture neutral again. From a fundamental/LT point of view, we remain sterling cautious. Last week, we advocated that the 0.9085/0.9130 area could turn out to be a difficult hurdle short-term. In a day-to-day perspective, we remain neutral for EUR/GBP and wait for a technical signal. ST trading is confined in the 0.8638/0.9072 trading range.

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Published on  Mon, Feb 23 2009, 08:42 GMT

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