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Sunrise Market Commentary: Currencies

FX dollar cedes ground

Thu, Jun 18 2009, 07:09 GMT
by KBC Market Research Desk

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On Wednesday, EUR/USD hovered up and down in the 1.38/139 area but in the end, the single currency won the battle. This was a bit remarkable as stock markets were under pressure for most of the time. EUR/USD moved higher early in the session, despite a poor (European) stock market performance. However, the test of the first obvious resistance level (Tuesday’s high) failed and EUR/USD returned to the opening levels. The dollar encountered renewed selling pressure after the publication of lower than expected US inflation data, but also this move had no strong legs. Later in US trading, a third EUR/USD attempt to clear the 1.3900/1.3930 area succeeded. We didn’t see any specific event to explain the move. US stocks markets recouping their early losses and a rather strong rebound in the oil price at that time probably played a role. Markets also turned their eyes to next week’s Fed meeting and many in the market apparently came to the conclusion that it is too early to expect any indication on a Fed rate hike anytime soon. If so, this might reduce the attractiveness of the US currency. After all, it was a disappointing session for dollar bulls. EUR/USD closed the session at 1.3942, little changed from the 1.3837 close on Tuesday. We didn’t see any direct impact from the US plans on financial regulation as revealed by the US president yesterday evening.

Today, the European eco calendar is almost empty. In the US, the weekly jobless claims the leading indicators and the Philadelphia Fed survey are scheduled for release. While interesting, any impact on the currency markets probably will continue to be indirect through the reaction on the stock markets (if any).

During the month of May, market sentiment was dollar negative and the euro took profit from improved global risk appetite. On top of that, there was still quite some uncertainty about next steps in de Fed policy and about the fiscal situation in the US. After the payrolls, it looked as if markets might shift their attention to the pace of the recovery in the US and its potential impact on the Fed policy. However until now, other data were not really strong enough to support this thesis and also the Fed strategy remains subject to a high degree of uncertainty. An early rate hike is far from a done thing and there remains a high degree of uncertainty as to whether the Fed will still have to expand the program of asset buying. So, at least until now, uncertainty on those items remained too high and the dollar failed to develop a clear (positive) trend. In this context, EUR/USD traders continued to watch investor sentiment (as mirrored in stocks and in commodities) as the most important guide for EUR/USD trading. Last week, we changed our EUR/USD bias from positive to neutral. For now, we hold on to that view. If the correction on the stock markets would go somewhat further, the dollar might gain some more ground against the single currency.

Looking at the technical charts, the medium term outlook remains euro constructive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). After the payrolls, quite a forceful correction occurred, but the move stalled before the first support at 1.3793 (reaction low). This level was temporary broken earlier this week but the key 1.3739 (previous reaction high) support area was not really challenged, yet. Nevertheless, the picture in EUR/USD is becoming heavier. In a day-to-day perspective we had a sell-on upticks approach. Yesterday’s dollar performance was far from impressive, but for now we hold on to that bias. A sustained rebound above the MTMA (today at 1.4017) would make the short-term picture neutral again.

On Wednesday, the dollar extended its decline against the yen. The decline on global stock markets, slightly lower than expected US inflation and the downgrade of several US banks all were enough a reason to sell the US dollar in favour of the yen. USD/JPY close the session at 95.75, compared to 96.38 on Tuesday evening. At least for now, it looks as if the yen is again (slightly) favoured over the dollar in times of global market uncertainty.

Overnight, most Asian stock markets extend the decline from the previous days (except for the Chinese indices). The World Bank upgraded the Chinese growth outlook for 2009 from 6.5% to 7.2%. Despite the stock market losses, USD/JPY is being traded very close to yesterday’s closing levels.

Global context. Since March, USD/JPY developed a sideways trading pattern between 101.40 and 93.86/54 (May low/March low). The ‘traditional link’ between USD/JPY and the performance of global stock markets/risk appetite was no longer as tight is it used to be some time ago. Global dollar weakness was the name of the game, even as the dollar losses in this cross rates were rather limited. At the end of May, USD/JPY came relatively close to the key 93.54 range bottom, but a real test/break didn’t occur and USD/JPY returned higher in the medium term trading range. Last week, the rebound ran into resistance ahead of the first resistance area (the early May highs) and this week’s break below the 97.08 neckline suggested that the short-term momentum in his pair had deteriorated. So, the yen might gain some further ground as long as the global stock market correction persists. Nevertheless, we expect the range bottom (MT reaction lows at 93.86/93.54) to hold. Basically, this remains a range-trading story.

On Wednesday, sterling finally made a step backward against the dollar and the euro as investors cashed profits on the recent rally of the UK currency. Sterling lost already ground at the start of trading in Europe and the UK data were not able to reverse this trend. Nevertheless, the labour market data were less negative than expected as only 39K jobs were lost while markets expected a loss of 60K. The minutes from the previous BoE meeting didn’t bring any high profile new info. The BoE gave no hints on any (additional) policy measures and was cautious on the economy. The bank also indicated that the rise in sterling would reduce the boost in net trade arising from the depreciation since Summer 2007. After some nervous swings immediately after the publication of the data and the Minutes, EUR/GBP simply extended the rebound/correction that started early in the session. The pair reached an intraday high in the 0.8535 area and closed the day at 0.8504, compared to a close of 0.8432 on Tuesday evening. BoE King in its speech at the Mansion House, addressed the problems of the banking sector, but the speech had no impact on the currency market.

Today, the UK eco calendar contains the retail sales, the May public sector borrowing data and the CBI industrial trends total orders. Recently, UK eco data often tended to come out on the stronger side of expectations and this fueled the recent sterling rebound. However, this pattern was questioned after yesterday’s labour market data. Another disappointment (especially for the retail sales) might cause some additional profit taking on recent sterling rally.

Recently, we were a surprised by the force of the sterling rebound. We saw the aggressive BoE QE policy (even extended at the previous BoE meeting) as a reason to stay cautious on sterling. However, improving eco data were a good reason for investors to turn sterling positive. As we give much weight to the technical charts in our tactical approach, we couldn’t do anything else but drawing conclusions as EUR/GBP fell below the key 0.8637 level. This move forced us to leave our longstanding buy-on-dips approach. We turned to a neutral approach vis-à-vis the UK currency. We don’t expect a swift and forceful break lower in EUR/GBP. Nevertheless, the break below this key support level is an important signal/confirmation that something has changed in market sentiment towards the UK currency.

Yesterday, there was a first tentative sign that the sterling ascent might lose momentum. Over the previous days we indicated that we thought that enough good news for sterling had been priced in at the current levels and advocated some profit taking on ST EUR/GBP shorts. We don’t cry victory yet, but after yesterday’s correction, we hold on to this tactics. The pair regaining the MTMA (today at 0.8582) would be an indication that the sterling rebound has run its course for now.

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Published on  Thu, Jun 18 2009, 07:14 GMT

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