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Sunrise Market Commentary: Currencies

USD−slide continues

Thu, Sep 10 2009, 09:10 GMT
by KBC Market Research Desk

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On Wednesday, EUR/USD showed additional follow-through gains on the back of Tuesday’s break above the key 1.4450 resistance area. There was not much news behind the move. Global economic optimism supported by policy markers’ commitment to maintain policy stimulation in place for a prolonged period of time is the key factor for trading on almost all market. The low-yielding dollar apparently is competing with the yen as funding currency for setting up new carry trades. This is weighing on the US currency. The trade weighted dollar yesterday reached new lows for this year below the 77 mark. We’re still convinced that the current dollar weakness is not only the result of the improvement in global investor risk appetite, but also of underlying market worries on the US imbalances and funding needs. However, we have to admit data that yesterday’s US 10-year auction went again very smooth. So, from that point of view, investors apparently are still prepared to accumulate (some) USDdenominated debt at current market prices. Nevertheless, EUR/USD closed the session at 1.4557 compared to 1.4478. The Fed Beige Book maintained a soft tone on the US economy, but had no lasting impact on the currency market. However, this only confirms the view that (US) policy makers are not preparing a withdrawal of the stimulating monetary policy.

Today, the European eco calendar only contains some second tier data. In the US, the trade balance and the claims are scheduled for release. Later in the session, some Fed members will speak, including Fed’s Kohn on unconventional monetary policies. The claims might be important in case of a deviation from consensus. Especially an unexpected improvement could fuel market optimism. Recently, this was no help for the dollar. Later in the session, the Treasury will auction $12 B of 30-year bonds. Earlier this week, the 3 and 10-year auction were well bid and had no (negative) impact on the dollar. However, investor interest for US assets continues to deserve some attention.

Global context. Since early June, the EUR/USD currency pair had been locked in a sideways trading pattern. Recently, there were encouraging signs that the worst of this crisis might be over. However, the Fed and the ECB recently indicated that the current stimulating monetary policy will remain in place for an extended period of time. So, interest rate expectations/interest rate differentials do not offer a clear guide for EUR/USD trading and this probably won’t be the case anytime soon. By default, swings in risk appetite/risk aversion were the most obvious alternative to guide the price action on the currency markets. In this context, a decline of the dollar was often considered as a signal of improving global investor sentiment. This trading theme has had its merits in understanding the rebound of the euro (and several other currencies) during the early phase of the global (stock market) rebound. However, recently, the market focus gradually turned more to dollar weakness, rather than strength of the other major currencies including the euro. The huge US financing needs together with the Fed’s intention to run an expansionary monetary policy for a pronged period of time have put the dollar in a vulnerable position. We don’t see this environment changing anytime soon. In case of an acceleration of the USD-decline, markets will look to the central bankers (interventions), but we don’t have the impression that coordinated action is around the corner.

Looking at the technical charts, the EUR/USD currency pair set a minor new high in the 1.4448 area early in August, but at that time no follow through price action occurred. However, earlier this week EUR/USD cleared the previous range top and this break obviously improved the picture for EUR/USD. Recently we advocated not to front-run on a break above this level, we put stop-loss protection the cover a break of this key area. The 1.4719 December high is now the last area of defense. On a closing basis, EUR/USD already settled above the December highs. So, the red alert for the dollar is still in place. We continue avoid/protect all USD long exposure. A break above the 1.4719 area could pull the trigger for some kind of dollar panic.

On Wednesday, USD/JPY joined the broader USD-slide and the pair even temporary dropped below the key 91.73 level, testing bids in the 91.61 area. However, the test was rejected and the pair closed at 92.04, compared 92.32 on Tuesday.

This morning, Asian stocks (except for the Chinese stock markets) are in positive territory. The Japanese machinery orders showed an unexpected decline of 9.3% M/M in July. August wholesale price matched the 8.5% Y/Y decline from the previous month, fuelling deflation fears.

Global context. USD/JPY reached a short-term reaction high in the 97.80 area early August. However, despite a positive global investor sentiment the US currency could not hold on to its gains against the yen. This indicated underlying dollar weakness. The link between USD/JPY and global investor risk aversion/risk appetite has become somewhat asymmetric. Recently, USD/JPY hardly gained on a strong stock market performance while negative stock market corrections (or even a slowdown in the rise of the stock markets) continued to support the yen. One might even come to the conclusion that the dollar (and not the yen) is becoming the preferred funding currency for carry trades. As the pair came close to the key 91.73 support, we advocated profit-taking on USD/JPY short positions. However, the odds for a strong USD/JPY rebound are far from strong. So, this remains a sell-on-upticks environment. Return action to the 95.00 area would be a good opportunity to go USD/JPY short again. However, such a move is far from evident now. The short-term reaction high at 93.30 now is the first technical resistance area. A sustained break below 91.73/61 could trigger a new USD selling wave.

On Wednesday, sterling continued to cede ground against the de euro. The move started early in European trading and lasted till the end of the European session. The UK trade data painted a mixed picture. The deficit was higher than expected, but both imports and exports were up. So, from a currency point of view this was an ambiguous figure. Some negative comments from Alan Greenspan on the UK economy might have played a role, too. However, uncertainty going into today’s BoE meeting probably was the main reason for investors’ reluctance toward the UK currency. EUR/GBP closed the session at 0.8801, compared to 0.8783 on Tuesday.

Today, the Halifax house prices are on the agenda, but the market focus will be on the BoE policy decision. We expect the base rate and the Asset purchase target to remain unchanged, despite BoE’s King advocating a bigger effort at last month’s meeting. Such an outcome might trigger some short-term profit taking on the recent rise in EUR/GBP. However, we continue the see corrections lower in this cross rate as a buying opportunity.

Global context. Since mid June, the EUR/GBP cross rate entered a consolidation pattern. Sterling had come off from distressed levels at the end of last year. This move was supported by growing evidence that the decline in economic activity in the UK had moderated and by improved global investor sentiment. However, lingering uncertainty on the BoE’s quantitative monetary policy capped the rebound of sterling. The early August BoE decision to raise the asset purchase program to £175B indicated that the Bank intended to maintain a loose policy for a prolonged period of time. Governor King’s preference for an even larger effort suggested that a change towards a tighter policy was still very far away and was good reason to sell sterling. EUR/GBP cleared the top of the MT sideways trading range at the end of August. This break confirmed the deterioration in market sentiment towards the UK currency. The move ran into resistance in the 0.8840 area and some correction kicked in. Nevertheless, the (monetary) picture stays sterling negative. At the end of last week, the pair has come close to a first import support area (0.8700 area). This test was rejected. We maintain a buy-on-dips approach. 0.8839/66 area (Reaction high/June high) is the next high profile resistance on the charts. The first target of the double bottom formation with neckline at 0.8699 is seen at 0.8940.

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Published on  Thu, Sep 10 2009, 09:25 GMT

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