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Sunrise Market Commentary: Currencies

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US GDP release blocks correction on the currency markets

Fri, Oct 30 2009, 08:11 GMT
by KBC Market Research Desk

KBC Bank

On Thursday, the key question was whether the EUR/USD correction would continue. In previous days, there was no obvious economic story supporting that correction. However, it still was a key data release, notably the US Q3 GDP, which decided its fate at its end. During the morning session in Europe, stocks were in a wait-andsee mode and EUR/USD showed some signs of bottoming out, too. However, US Q3 GDP figure came out (slightly) better than expected and triggered a sharp reaction in all market. To be honest, it surprised us a bit. The GDP figure was not bad, but recently, global (equity) markets reacted mostly cautious to positive macro or corporate news. However, apparently a lot of investors concluded that the correction had gone far enough. Risk appetite is back. Stocks and EUR/USD jumped higher and this rebound lasted until the close. The pair closed the session at 1.4822, compared to 1.4706 on Wednesday. A market reaction is often the result of both technical factors and (economic) news and in this case, the long-standing uptrend line/support did its job very well.

Factors that are moving the market and need to be commented. However, we also mention a factor that the currency market ignored. ECB’s Weber hinted about the way the ECB will exit its extraordinary liquidity policy (see European bond part). He didn’t say anything on the timing, but the ECB is obviously no laggard in this exit debate. In theory, this is a supportive factor for the euro. We take also notice of the fact that the currency market didn’t react Moody’s decision to put the credit rating of Greece under review for a possible downgrade.

Today, the eco calendar contains the Euro-zone CPI flash estimate. Later in the session, the US calendar is well filled. The personal spending and income data are probably less important after yesterday’s GDP release, but markets will look out for the Chicago PMI and the Final Michigan consumer confidence. Once again, the stock market reaction will be the key driver for trading in EUR/USD. In this respect, it will be interesting to see whether yesterday’s rebound has strong legs. We don’t want to spoil the party, but are keen to see whether equities (and EUR/USD) will be able to hold on to yesterday’s rather forceful gains. If so, it would be a positive signal.

Global context: recently, the swings in risk appetite/risk aversion were the drivers on the currency markets. Improving investor sentiment towards 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 on 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 stay dollar skeptical as long as we don’t get a clear signal that the Fed is coming closer to scale down its stimulating monetary policy. Earlier this week, the ongoing building up of USD short positions in step with the stock market rally triggered a correction. However, yesterday’s strong Q3 US GDP figure blocked this correction, keeping the longstanding uptrend is place.

Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 and above the 1.4719 (Dec high) improved the picture, but the move continued to develop in a rather gradual way. Nevertheless, the corrections, if any, were very limited, too. As we had reached our long-standing technical target of 1.5021 (2nd target double bottom of 1.3739), we turned more cautious on the ST upside potential in the pair and advised partial profit taking on standing EUR/USD long positions. We were and are still looking to (re)establish EUR/USD long exposure, but were a bit surprised by yesterday’s forceful reaction. We maintain a buy on dips approach, but still don’t feel the need to rush in. A retest of the uptrend line is still a possibility.

On Thursday, the US GDP release was also the key factor for USD/JPY trading. The pair settled in the upper half of the 90 big figure in the run-up to this key US data release. The better than expected outcome was a good reason to unwind the defensive yen long positions that were installed over the previous two days. USD/JPY jumped higher on this release and the pair closed the session at 91.41, compared to 90.75 on Wednesday. Once again, it looks that the yen is still the currency that behaves most like the safe haven/carry currency in case of more pronounced moves on global markets.

This morning, the BOJ policy decision received quite some attention. The bank gave a mixed signal by ending the buying of corporate bonds and commercial paper in December, but it maintained a key funding program until March. We consider this a slightly ‘hawkish’ stance. However, for the currency market it is still not a big issue. This morning, the Japanese ‘inflation’ data remained deeply in the red, the Tokyo measure was even more negative than expected. On, the other hand, the labour market data were materially better than expected. Asian stocks/Japanese stocks opened with strong gains, but failed to extend this move further out in the session. This slowed the slide of the yen and USD/JPY even returned an important part of yesterday’s post GDP gains.

Global context: USD/JPY reached a reaction high in the 97.80 area early August. Despite 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 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. Situation in USD/JPY has become a bit paralysed. Recently, we indicated that we were looking to sell into a more pronounced up-tick, hopefully in the 92/93 area. The 92 area has been reached earlier this week. Earlier this week, we indicated that the short-term picture in USD/JPY had become toppish and we advocated to reinstall USD/JPY short positions for return action lower in the recent trading range. Yesterday’s post GDP rebound didn’t fit our scenario, but this price action in Asia this morning gives us some comfort. We hold on to our bias.

On Thursday, the rebound of sterling against the euro continued, albeit at a slower pace, compared to the previous session. The UK lending data gave a mixed picture, but still leave room for the BOE to raise its asset purchases next week. However, there was no reaction in EUR/GBP trading. There was some volatility after the US GDP data (asymmetric reaction in cable and EUR/USD), but calm soon returned. EUR/GBP closed the session at 0.8958, compared to 0.8981 on Wednesday.

This morning, the GFK consumer confidence improved from -16 to -14. Nationwide house prices rose 0.4%M M/M in October (2.0 % Y/Y). At the moment of writing there was no reaction on the currency market yet ton these slightly better than expected data. Is this an indication that the sterling rebound is loosing momentum?

Global context: Since early August, sterling sentiment deteriorated again. The BoE decision in August 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 and this applies also to the October meeting. However, the Minutes of that meeting nevertheless attracted the attention. Some observers correctly noted that in contrast to September meeting, the more dovish MPC members didn’t re-state there preference for more QE, making such an expansion of the QE unlikely, especially as some MPC members including governor King in a newspaper had become slightly more optimistic on the economy. We were not sure whether such an interpretation of the Minutes was correct and we probably only know at the next MPC meeting in early November. However, the weak Q3 GDP figures show the debate on QE is entirely open. This question will dominate markets in the next ten days. We have a long-standing sterling negative view and don’t feel any need to change it when considering the economic fundamentals and the BOE’s monetary policy approach. Nevertheless, this week’s below the key 0.8984 support is a technical warning signal. It at least suggested that the unwinding of sterling over overextend sterling short positions, was not completely worked out. For now we keep a wait and see approach to see how the test of this key support area will work out. However, it is obvious that our ST sterling negative bias is under pressure. If the pair doesn’t return above the 0.9000 mark soon, the correction might go quite a bit further. The 0.8845 area is the next high profile support on the charts.

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Published on  Fri, Oct 30 2009, 08:27 GMT