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Sunrise Market Commentary: Currencies

BOE and ECB interest rate decisions leave few traces on the FX market

Fri, Mar 6 2009, 08:19 GMT
by KBC Market Research Desk

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On Thursday, the EUR/USD currency pair drifted south, especially during the Euro-pean trading session. The pair lost already part of the Wednesday gains in Asia and this trend was extended after the start of trading in Europe. The drivers behind the move were rather straightforward. European stock markets took another hit and in-vestors kept a wait-and-see attitude ahead of the ECB interest rate decision and press conference. The ECB as expected cut rates by 0.5% to 1.5%. The euro re-corded quite a sharp loss at the start of the press conference (due to the downward revision staff’s economic growth projections?). In the press conference, Trichet kept the door open for additional rate cuts, but avoided to give any clear hints on addi-tional unconventional measures. EUR/USD soon reversed the losses at the start of the press conference and settled in the mid 1.25 area. The ongoing sell-off on the stock markets was more or less ignored. EUR/USD closed the session at 1.2540, compared to 1.2661. Looking at the weekly graph, the EUR/USD pattern is still highly indecisive. Yesterday’s decline did unwind Wednesday’s rebound, but in fact not that much has happened.

Today, there is only one major item on the eco calendar, but is a very important one: the US payrolls report. The figure will get ample media coverage, also outside the fi-nancial media. The consensus looks for a job loss of 650 000, but after the awful ADP report earlier this week, an even bigger loss (700K) probably wouldn’t come as a surprise anymore. In this respect, we’re not sure that even a very negative figure should still have a very deep impact on the currency markets. The impact from the payrolls on EUR/USD trading will probably come through the stock market reaction. However, even this channel/mechanism (global negative news is negative fore the euro) lost a lot of its power lately. It was not the market way of thinking of late, but one can even raise the question whether an extremely negative payrolls report couldn’t cause some damage for the dollar, too.

Global context. Since the start of the year, EUR/USD was on the defensive. Europe was seen more vulnerable to the global crisis and less flexible in addressing the fall-out from the financial turmoil. The deterioration of the European government fi-nances and the widening intra-government spreads was seen as illustration of intra EMU tensions and fuelled the euro-negative sentiment. On top of that, the euro re-mained a gauge of global risk aversion. The US story has also been far from brilliant, but the dollar took advantage from its safe haven status. Since mid January, the EUR/USD decline shifted into a lower gear but any attempt of the euro to regain ground immediately ran into resistance. Mid February, market fears that the deepen-ing 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. This illustrated to euro skeptic sentiment. A change in the global nega-tive sentiment is needed to give the euro some better downside protection. At least for, we don’t see such a trigger available. By default, the gradually euro downtrend persists. Nevertheless, we have the impression that the downside in the pair is also becoming more difficult (no new ST low after yesterday’s stock market sell-off). A tentative sign of a bottoming out process?

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 more trouble for the single currency. For now this is not our preferred scenario. In this re-spect, we even are inclined to take partial profit on longstanding EUR/USD short.

On Thursday, USD/JPY set a new reaction high at the start of trading in Europe, but the dollar rebound lost its momentum and throughout the session the pair gradually lost more ground. The sharp decline on the US and European stock markets (also when compared to the less pronounced losses in Asia), might have played a role. We don’t go that far yet to conclude that the yen regains its safe haven status, but at least there are tentative signs that the ease gains for the US currency are over. USD/JPY closed the session at 98.07, compared to 99.15 on Wednesday.

This morning, there were no important eco data on the calendar in Japan. The Nik-kei lost 3.5% after the sell-off in the US yesterday evening. The losses on most other Asian stock markets are much more limited.

Global context. 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 decent rebound that accelerated over the previous two weeks. The underly-ing yen-momentum obviously has weakened. The yen decline was not driven by im-proved market risk appetite, but by rising worries on the Japanese economy. Over the last two weeks, we had a buy-on-dip approach in this pair. The break above the key 94.65 resistance improved the ST picture further. The next important resistance comes in the 100.55/102.20 (04 Nov high)/2nd target double bottom off 94.65). Yes-terday, the USD/JPY rebound obviously lost momentum. The technical picture hasn’t materially changed yet. A drop below the 96.89/67 area (reaction low/MTMA) would question the short term upward bias in this pair (partial protection of USD/JPY longs).

On Thursday, all eyes were on the BoE interest rate decision. The 0.50 rate cut was expected. However, the announced framework for quantitative easing triggered quite an impressive reaction on the UK bond markets. The announced buying of UK Gilts hammered UK interest rates, especially at the long end of the curve. However, in the impact on the currency markets was very limited, even as there was a big contrast between the bold BoE approach and ECB’s Trichet wait-and-see approach on quantitative easing. Sterling lost some ground against the euro ahead of the BoE interest rate decision, but the euro was again sold at the start of the ECB pres conference, just to recoup part of those losses later in the session. EUR/GBP closed the session at 0.8882, compared to 0.8920. However, in a broader perspective, the currency market obviously doesn’t draw any firm conclusions on the BoE moving ever further in unconventional territory.

Today, the UK calendar contains the PPI data, but price indicators are not really a bit point of attention for the currency markets. Global sentiment will continue to set the tone for trading in EUR/GBP.

Global Medium term context. At the start of 2009, EUR/GBP made a forceful cor-rection after the steep gains mid-December. A first rebound ran into resistance in the 0.95 area and another forceful correction even caused the pair to test the high profile support (0.8663 area previous high) but the test was rejected. The subsequent re-bound called off the short-term alert in EUR/GBP and made the picture neutral again. From a fundamental/LT point of view, we remain sterling cautious. However, we have to admit that for now sterling has weathered the quantitative easing debate rather well. Recently the 0.9085/0.9130 resistance area turned 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. There are some tentative signs that the bottom in the pair (and in EUR/USD) has become bit better protected, but we don’t want to font-run on this as long has we don’t get a clear technical signal.

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Published on  Fri, Mar 6 2009, 08:23 GMT

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