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Sunrise Market Commentary: Currencies

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FX major cross rates remain within the established ranges

Tue, Jun 30 2009, 07:11 GMT
by KBC Market Research Desk

KBC Bank

On Monday, EUR/USD again mostly tracked the price action on the stock markets. European stocks opened in negative territory but investor sentiment improved later in the session. This improvement was also visible in the rise of the oil price. The move was reinforced by better than expected economic sentiment indicators from the European Commission. After the BIS meeting, there were still some headlines on the screens on the dollar’s status of reserve currency. However, this factor was only of second tier importance for trading. At the same time the BIS (and also the European commission) published reports on the need for a profound reform of the banking sector to facilitate the economic recovery. However those reports didn’t hamper the global (stock market) sentiment. EUR/USD trended higher for most of the day and closed the session at 1.4083, compared to 1.4056 on Friday evening. This constructive global sentiment persisted in overnight trading and EUR/USD is currently traded above the 1.41 mark.

Today the calendar contains quite some interesting releases. In Europe, the German unemployment figures, the June CPI Flash estimate and the M3 money supply data. Usually those data are no market movers. Nevertheless, we take a close look at the European money supply and lending data. It is still early days and we don’t expect the ECB to announce any major change in its tactics at this week’s policy meeting. Nevertheless, further evidence that the recent monetary policy steps of the ECB don’t translate into easier availability of credit in the economy might over time fuel the debate whether the ECB should take additional unconventional policy steps. It is still a very long call, but such a scenario would not be euro supportive. In the US, the CS home prices, the Chicago PMI and the consumer confidence are scheduled for release. As usual, the impact of those data on EUR/USD most probably will go via the reaction on the stock markets. On top of that there a series of policy makers will take stage. Among others, Fed’s Bullard will speak on Fed exist strategies.

Global context. During the month of May, EUR/USD performed quite a strong rally. The euro profited from improved global risk appetite. On top of that, investors were cautious on the dollar as there was still quite some uncertainty about next steps in the Fed policy and about the fiscal situation in the US. The EUR/USD ascent stalled after the better than expected US payrolls report early June. It temporary looked as if markets would shift their attention to the pace of the recovery in the US and its potential impact on the Fed policy. However, until now, other hard data mostly were not strong enough to support this thesis. Last week’s FOMC meeting didn’t bring any insights on new/additional policy steps either. So, until now, there are no indications that the Fed policy will turn more dollar supportive anytime soon. On top of that, the debate on the role of the USD as reserve currency sometimes also caused some temporary dollar nervousness.

Recently, the ECB side of the story was not really important for price action in EUR/USD. However, last week, we noted signals from Mr. Weber that the ECB measures don’t filter through enough into bank lending. This debate is still in its very early stages but it deserves the attention, also from a currency market point of view. The ECB potentially moving further in the direction of new unconventional measures might, at some point, become a negative factor for the euro, too. In this respect, today’s EMU Money supply/lending data deserve some attention (cf supra). We also take a close look whether the ECB will elaborate on this item at the press conference on Thursday. In a short-term perspective, EUR/USD traders mostly continue to watch investor sentiment (as mirrored in stocks and in commodities) as the most important guide for EUR/USD trading. Over the previous two weeks, we had a neutral bias for EUR/USD. For now, we hold on to that view.

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 a test of this key level didn’t take place and the EUR/USD currency pair settled in a sideways trading pattern between 1.3739 and 1.4338. The pair returning above MTMA and above the previous short-term highs (1.4013/33) made the short-term picture again neutral. A break above the 1.4178 reaction high would open the way for a retest of the range to at 1.4338. We expect this level to be difficult to break short-term. A break above the 1.45 area, would suggest the risk for a more profound loss of confidence in the US dollar and could even lead to dollar panic. This is not our favorite scenario.

The USD/JPY initially developed a sideways trading pattern in the low 95-area. However, the rather steep rise in the US stock market indices early in US trading triggered the usual yen-selling. USD/JPY swiftly returned above the 96 mark and closed the session at 96.06, compared to 95.18. As such USD/JPY recouped its Friday’s losses.

Overnight, Japanese labour market data were again weak with the jobless rate rising to 5.2% and the job-to-applicant ratio declining to a low 0.44. On the other hand, household spending came out better than expected at 0.3%. Y/Y (compared to - 1.3% in April). Japanese/Asian stock markets mostly join the positive trend in the US and in Europe yesterday. However, at least for now, this fails to give USD/JPY any support.

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 still played a role, but is no longer as tight is it used to be some time ago. 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. The subsequent rebound ran into resistance ahead of the first resistance area (the early May highs). In a longer term perspective, this remains a range trading story. We expect the range bottom (MT reaction lows at 93.85/93.55) to hold. We are not in a hurry, but we look to buy in case of return action towards the range bottom. In a dayto- day perspective, watching the stock markets remains the name of the game.

On Monday, the EUR/GBP pair extended last week’s consolidation pattern. The pair set intraday lows in the 0.8475/80 area at the start of trading in Europe but recouped most of the earlier losses later in the session. The UK lending data and mortgage approvals were weak, but these data only had a very limited impact on sterling trading. EUR/GBP closed the session at 08501, little changed from the 0.8507 close on Friday.

This morning, GFK consumer confidence improved from -27 in May to -25 this month. The outcome was in line with expectations. Nevertheless, sterling gained some ground against the euro in Asia. At 08.00 the Nationwide House prices came out better than expected (0.9M M/M and -9.3% Y/Y). EUR/GBP tumbled to the mid 0.8450 area after the release. The move suggests that sterling remains sensitive to positive UK figures. Later today, the Final Q1 GDP figures and the Q1 current account will be published. Usually these data are no market movers.

Global context. During the month of May, sterling performed a remarkable rebound against the euro (and the dollar). Improving eco data were a good reason for investors to turn sterling positive. The break below the EUR/GBP level of 0.8637 was a clear signal that something had changed in investor sentiment towards the UK currency. This move forced us to leave our longstanding buy-on-dips approach in the EUR/GBP pair. We turned to a neutral approach vis-à-vis the UK currency. Nevertheless, there is still a lot of uncertainty on the BoE policy going forward (additional buying of assets?). On top of that, recent comments from BoE policy members gave the impression that they felt quite comfortable with a weak pound to support the economy.

Over the previous two weeks, there were tentative signs that the sterling ascent was losing momentum. Recently, we indicated we thought that enough good news for sterling had been priced in at the current levels and advocated profit taking on EUR/GBP shorts. We hold on to this tactics, even if we have to admit that the sterling showed rather resilient until now. Regaining the 0.8598/0.8605 area (Reaction highs) would call off the ST alert in EUR/GBP and would be an indication that the EUR/GBP rebound could have some further to go. For now the pair is locked in a 0.8400/0.8600 sideways trading range.

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Published on  Tue, Jun 30 2009, 07:24 GMT