• Home ::
• Fundamental ::
• Market View ::
• Sunrise Market Commentary: Currencies

Sunrise Market Commentary: Currencies

Dollar remains under pressure

Thu, Oct 8 2009, 07:47 GMT
by KBC Market Research Desk

KBC Bank  |  View company's profile

Vote:

e9383610-73ac-4a7f-8789-8e7fc539f8b6

7

0

• Send
• Print
• Add To
• Rss

After a session with a lot of fireworks on Tuesday, markets entered calmer waters yesterday. Eco data were few. The German factory orders were slightly better than expected but European Q2 growth was revised slightly lower from -0.1% Q/Q to - 0.2% Q/Q. The latter was completely irrelevant from a market point of view, but together with a very moderate correction on the equity markets, it was a good excuse to take some profit on Tuesday’s EUR/USD rebound. So, the a test of the 1.4803/45 area didn’t occur and EUR/USD drifted south below the 1.47 mark, awaiting the things to come: the US 10-year auction and the earnings from Alcoa and its potential impact on the equity markets. The 10-year Note auction went well, but didn’t impact the dollar. Alcoa surprised analysts by posting a Q3 profit instead of an expected loss, but also here it couldn’t give the pair much direction.

EUR/USD closed the session at 1.4692, compared to 1.4722 on Tuesday evening. The newswires/news providers brought still a lot of market talk on future role of the dollar, e. g. with respect to oil transactions, but it had no additional negative impact on trading. Nevertheless, the fundamental debate on the status of the dollar is heating up. Overnight, the dollar came again under pressure. The trigger was a stellar job report in Australia. On the back of the rate hike on Tuesday, it suggests that the RBA will have to raise rates rapidly again and probably by more than expected until now. This contrasts with the near 0% rate in the US where the Fed isn’t anytime close to hiking rates. So, talk about carry trades funded in USD is flaring up. Other Asian currencies are profiting as their economies are thriving well too and traders reported that several Asian Central Banks were seen buying dollars. Attention focuses now on the Bank of Korea who meets tomorrow amid speculation it might hike rates. This risks of course more Won strength, something the Central Bank is afraid of. The weakness of the dollar against the Asian currencies was transferred to the EUR/USD that rose to about 1.4770 overnight, closing in on the recent highs.

Today, the eco calendar is again more inspiring. The German production data and the US jobless claims are interesting and may have intra-day impact on EUR/USD trading. However, the ECB policy decision and press conference are the key. Usually, the ECB refrains from high profile comments on the external value of the euro. In ECB policy framework, the external value is an input for its inflation scenario, but no objective of policy. However, recently, ECB’s Trichet and other ECB board members stressed that the rebalancing of the global economy didn’t mean the dollar had to weaken versus the euro. Such weakening was needed against Asia with which the US has a huge trade deficit. We don’t expect hard talk or action from the ECB to stress its opinion on EUR/USD, but it remains interesting to see how much weight the ECB will give to the strength of the single currency. (e. g; is it addressed in the prepared statement or will Tichet only repeat the new ECCB mantra in case of a question?). After the close of US markets, Fed Bernanke will speak on a very interesting in issue for all markets: the Fed’s balance sheet.

Global context: recently, the swings in risk appetite/risk aversion were the obvious drivers on the currency markets. In this context, improving investor sentiment toward risk is still considered a good reason to sell the US dollar. On top of that, in this low yield environment, the dollar has become (or is at least perceived to have become) the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs, some international debate the status of the dollar and the Fed’s intention to run an expansionary monetary policy for a prolonged period of time offer additional ammunition for carry traders to use the dollar rather than other currencies. This has put the dollar in a vulnerable position. We don’t see many reasons to turn dollar positive before it becomes clear that the Fed will start tightening monetary policy. Last week’s US payrolls report only reinforced the feeling that point hadn’t been reached. Any correction on the stock markets might still have some impact EUR/USD. However, as we expect corrections on the liquidity driven rally on the stock markets to be limited, the downside in EUR/USD well protected. From the euro side of the story, we keep a close eye on today’s ECB meeting, but we don’t expect Trichet to rock the boat on the currency issue (cf. supra).

Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 improved the picture. The pair extensively tested the key 1.4719 December high and even set a new minor high (1.4844). However, there was no followthrough action on this ‘break’. Following a correction, that narrowly missed the 1.4438/50 break-up area, put forward as offering a good opportunity to step in again, the pair is again closing in on the 1.4844 resistance. If the stock market rebound continues, the 1.5021 target (2nd target double bottom of 1.3739) might come again in the picture and the technical picture would get yet another EUR bullish upgrade.

On Wednesday, USD/JPY continued to drift south. There was a lot of market talk on option related activity with markets looking to trip stops in the key sub-88 area. However, the attempt didn’t succeed (88.01 for a low) and USD/JPY rebounded to the 0.89 area. A senior IMF Director indicated that in the Fund’s view the current value of the yen was not out of line with medium term fundaments. The impact on USD/JPY trading was limited. Nevertheless, the pair couldn’t sustain above USD/JPY 89 and closed the session at 88.61, compared to 88.82 on Tuesday evening. Overnight, the dollar selling resumed, essentially driven by events in Australia (see EUR/USD) and AUD-induced general dollar weakness. The pair slid to the low 88’s, but without much momentum or specific Japan news behind. Speculation on whether the Japanese will intervene and at what levels is lively, with analysts tending to believe the government will only become more serious on the issue if the economy would show again more signs of weakness maybe towards year end of in early 2010. We are not sure that it will be the economic data that are the referee. An acceleration of the strengthening of the yen and disorderly moves may be enough to convince Japanese authorities to intervene.

Global context: USD/JPY reached a reaction high in the 97.80 area early August. Despite a positive global investor sentiment, the dollar could not hold on to its gains against the yen. The link between USD/JPY and global investor risk aversion/risk appetite became less tight and sometimes it had even reversed. The dollar (and not the yen) was said to have become the preferred funding currency for carry trades. So, the price action in USD/JPY more or less joined the global dollar trend (decline). The long-term trend obviously remains USD/JPY negative. However, recently, we turned more cautious on USD/JPY shorts on technical considerations. On top of that, the change in talk from the Japanese authorities also slowed the ascent of the yen. So, the situation in USD/JPY has become a bit paralysed. We still look to sell USD/JPY in case of a more pronounced up-tick. The 87.10 (year low) area remains the next high profile target on the downside for this pair. Even as we have a longterm yen positive bias, we would not go yen long at the current levels as Japanese authorities will most probably continue to use verbal interventions to prevent a to swift rise of their currency. The 92/93 area might be a good entry point if the correction would go that far.

On Wednesday, the sterling storm that resurfaced on Tuesday after the very poor UK production data calmed down. There were only some second tier UK eco data on the agenda. A shy attempt to break above Tuesday’s highs failed. Later on, the sterling even gained some ground in what we would qualify as a technical-inspired corrective move on recent sharp weakening. EUR/GBP closed at 0.92011 versus a previous close at 0.92475. Overnight, EUR/GBP moved again higher and changes hands at 0.9269. Sterling as a low yielding currency remains vulnerable as risk appetite increases, which was the theme overnight after Australia reported unexpected strength in its labour market.

Today, the focus is on the BOE policy meeting. However, we expect to Bank to maintain its wait-and-see mode until the November meeting (when a new inflation report will be available). Last month, there was a very small sterling positive reaction as the BOE didn’t decide to raise the amount of asset purchases (which apparently was still seen as an outside chance in the market at that time). A similar, very brief sterling rebound was seen after the publication of the Minutes of the September meeting as it appeared that the Bank voted 9-0 to keep the amount of asset purchases unchanged. So, BoE’s King didn’t vote for raising the amount as he did in August, but indicated at the same time that his case was still valid. After the recent sterling sell-off, an unchanged decision might trigger a similar, technical reaction. However, if any, we don’t expect it to have strong legs.

Global context: Since early August sterling sentiment deteriorated again. The August BoE decision to raise the asset purchase program to £175B and Governor King’s call for an even greater effort indicated that the Bank intended to maintain a loose policy for a prolonged period of time. This triggered a new sterling selling wave. At the September meeting, the BoE took no additional policy steps. Nevertheless, the (monetary) picture stays sterling negative and more BOE talk on the positive effects of sterling weakness for the UK economy reinforced investors’ feeling that the BOE was quite happy with the course of events. We have a long-standing sterling negative view and don’t feel any need to change it. However, recently we advocated some caution on the recent steep EUR/GBP rise. Last week, there was a temporary unwinding of overextended sterling short positions. Recently, we were looking for a correction to go add/reinstall EUR/GBP long positions. The 0.9080 area (previous high) has already been tested twice. So, its might become a hard nut to crack. A break above the 0.93-area could reinforce the EUR/GBP ascent. 

• Download Full Sunrise Market Commentary Currencies

Published on  Thu, Oct 8 2009, 07:57 GMT

Vote:

e9383610-73ac-4a7f-8789-8e7fc539f8b6

7

0

• Send
• Print
• Add To
• Rss