On Monday, EUR/USD developed a rollercoaster trading pattern. It was already visible at the end of last week that the single currency was not in great shape and EUR/USD was again under pressure at the start of the new trading week. In the first trading hour, the pair lost more than one big figure and revisited the previous low in the 1.3310 area. However no real break occurred and the pair recouped the earlier losses. Trading was very much order driven as there were no eco data on the agenda. However, also this rebound was short-lived. Later in the session, S&P put the AAA rating of Spain on credit watch negative. The S&P action came on the heels of the announcements for Ireland (outlook negative) and Greece (Watch negative) on Friday. This illustrates the consequence of the financial crisis for the European governments and also raises the uncertainty on the financing conditions for these governments. A widening of the credit spreads between the euro-zone member states is no good news for the single currency. EUR/USD even briefly dropped below the 1.33 area after the announcement but again managed to undo most of the losses and closed the session at 1.3362, compared to 1.3476 on Friday. The poor stock market performance probably hampered the upside potential of the US currency.
Overnight, EUR/USD came under pressure again and the pair currently trades below the key 1.33 support area.
Today, the calendar heats up with the November US trade balance. The trade balance often contains conflicting signals for the currency market, but this time the consensus expects a material decline of the US trade deficit in November. So, in a cautious dollar constructive context, this might help the dollar to gain some further ground against the euro. The euro-zone calendar is less inspiring. Later in the session (currency) traders will take a close look at a speech of President-elect Obama on the economic crisis and the on the policy response.
Since the start of the new year, we indicated that currency traders didn’t find a straightforward new trading theme. Should the dollar get the advantage on the expectation that the US economy will emerge from the crisis first, supported by hefty stimulus measures? Or will the dollar suffer from the flood of liquidity and extremely low interest rates as the Fed’s shifts towards quantitative easing? For now it looks as if the market is inclined to give more weight to the negative news coming from the euro-zone. The deterioration of the (European) government finances now comes to the forefront. This is of course also the case for the US, but according to current investor sentiment, this is assumed to be less of a problem. The uncertainty on the ECB policy/Thursday’s interest rate decision is no support for the euro either. To conclude: the market was already Euro-skeptic at the start of 2009 and the credit headlines on the European governments only reinforces this (ST?) euro skeptic market attitude. Longer-term we continue to have serious doubts on the chances for a protracted dollar rebound. However, the ST momentum is turning ever more EUR/UISD negative.
From a technical point of view, EUR/USD in December broke above the previous sideways trading pattern and an important downtrend line (cf. graph). This made the MT picture for EUR/USD positive. However, the rebound lost momentum in the second half of December and in a forceful correction, EUR/USD dropped last week to the top of the previous sideways range (1.3300 area). This level held but the subsequent EUR/USD rebound had no strong legs either. The pair currently tends to fall back in the previous sideways range (1.2330/1.3292). If this return is confirmed in the hours to come, it would negate our cautiously positive/buy-on-dips bias in this pair. Tight stop-loss protection on ST EUR/USD longs is highly warranted.
On Monday, Japanese markets were closed. Initially, the USD/JPY pair traded sideways in the 0.90 area but already showed some cracks at the end of the morning session in Europe. A poor performance of the US stock markets and the S&P rating action (trough EUR/JPY) caused USD/JPY to lose more than one yen and the pair even temporary dropped below the 89.00 area. USD/JPY closed session at 0.8922 compared to 90.39 on Friday.
This morning, the Japanese trade balance/current account data came out close to expectations. A sharp rise in bankruptcies (24.1% Y/Y in Dec versus 5.2% in Nov) did catch the eye. Japanese stock markets (-4.79%) had some catch up to do on the ‘correction’ in other stock markets worldwide. There are a lot of headlines from the political scene in Japan as an ex-Minister announced to leave the LDP. As one could expect with the yen strengthening beyond USD/JPY 90, Finance Minister Nakagawa said Japan is watching market movements closely.
Looking at the charts, global market stress and overall dollar weakness in the wake of the US Fed’s announcement on quantitative monetary easing hammered USD/JPY and the pair set a reaction low in the 87.15 area on December 17. Since then, the pair entered calmer waters. USD/JPY first settled in a sideways trading pattern close to the 90 mark and tried to move higher supported by the ‘improvement’ in stock market sentiment during the first days of the new year. The pair tested a first resistance area around 94. The level was temporary broken, but the test was rejected. The long-term trend in the pair remains negative. In a day-to-day approach we continue to prefer a sell-on-upticks approach. A break above the 94.63 reaction high would question our ST negative bias. The downtrend might slow below 0.9000 as officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8720 reaction low. Nevertheless, with risk aversion again on the rise, there is no reason at all the fight the trend.
Elsewhere in the Asia-Pacific region, the kiwi dollar tumbled after S&P revised the New-Zealand foreign currency outlook to negative from stable.
On Monday, EUR/GBP trading was again affected by conflicting signals. The euro traded very nervously against the dollar but resurfacing risk aversion caused some profit taking on the recent sterling rally against the euro. EUR/GBP started the session in the 0.8865 area, but already regained the 0.9000 area at the start of the US trading session. The pair briefly lost ground after the S&P rating action on Spain, but the correction was short-lived and EUR/GBP closed the session at 0.9020, a decent gain compared to the 0.8878 close on Friday.
Overnight, The BRC retail sales monitor painted a grim picture of the sector performance in December (a steep 3.6% decline Y/Y, the worst since 1994). The RICS house price balance improved marginally from -76% to -73% but stayed at an extremely low level.
At the start of 2009, the pressure on sterling eased and this trading pattern was extended after Thursday’s BoE interest rate decision. On top of that, Euro skepticism also weighed on EUR/GBP at the end of last week. However, yesterday’s price action illustrated that sterling sentiment remains fragile, too. This theme could continue to play its role ahead of Thursday’s ECB interest rate decision and press conference. Nevertheless, we remain sterling skeptic as long as we don’t receive a sign that the weakness of sterling gets more weight in the BoE’s monetary policy assessment and/or unless we get a clear sign on the technical charts.
On the technical charts, the break above a series of high profile resistance levels in November/December has made the long term technical picture outright positive for EUR/GBP. Since start of 2009, EUR/GBP showed quite a forceful correction but in our view this move still didn’t change the long-term sterling negative picture yet. The battle for the 0.9000 area continues. Nevertheless, we still consider the current move as corrective in nature. Long term, we still look to buy EUR/GBP but we’re not in a hurry and wait to see how far the current correction has to go (yesterday EUR/GBP set a marginally higher low for the first time in 2009). A sustained return below the previous high (0.8663) would question our long-standing sterling negative attitude.
