On Tuesday, EUR/USD extended the decline from the previous sessions. There were no important European eco data but this didn’t take the pressure away from the single currency. The threat for rating downgrades from several European member states continued to weigh on euro sentiment. A speech from Fed Bernanke didn’t bring much new info to the market. Later in the session, markets watched out for the US trade balance data. The US trade deficit declined sharply; which is intrinsically good news for the US currency. However, the steep decline in imports (while partially due to lower oil prices) also suggests a very poor momentum in US domestic de-mand. So, the dollar continued its intraday uptrend against the euro after the publica-tion of the report, but the impact of the release was not really spectacular. During the afternoon, S&P also put the AA- rating of Portugal on watch negative and this caused additional euro losses. The pair reached an intraday low in the 1.3150 area late in US trading and closed the session at 1.3182, compared to 1.3362 at the close on Monday evening.
Overnight, EUR/USD performed a technical rebound on the recent losses, with the pair trading in the 1.3280 area at the moment of writing.
Today, the calendar contains the European November industrial production data. However, the market focus will be in the US import prices (deeply negative), the Business inventories and on the US retails sales for the month of December. The lat-ter is of course a key piece of information on the US economic performance at the end of last year. It would be interesting to see the market reaction in general and the reaction of the dollar in case of another weaker than expected figure. Will bad news from the US also be bad news for the dollar? Aside from the eco data, markets will also take a close look at the auctions from Germany and Italy and will keep tomor-row’s ECB interest rate decision in mind.
Since the start of the new year, we indicated that currency traders didn’t find a straightforward new trading theme. There is still a lot of uncertainty on the US econ-omy and on the consequences of the quantitative easing. However, 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 in-vestor 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. In the current euro skeptic sentiment, one can raise the question whether the ECB can do any good for the euro at tomorrow’s meeting. A cut might be considered as the ECB admitting the sharp deterioration of the European eco situation; an unchanged deci-sion will most probably cause market headlines on ECB being behind the curve.
The conclude: the market was already Euro-skeptic at the start of the new year and the credit headlines on the European governments only reinforces this (ST?) euro skeptic market attitude. Longer-term we continue to have doubts on the chances for a protracted dollar rebound. However, the ST momentum remains EUR/USD nega-tive.
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 sec-ond 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 initially held but yes-terday the pair fell back in the previous sideways range (1.2330/1.3292). If this re-turn would be confirmed, it would be undone by the MT euro positive bias and make the picture again neutral.
On Tuesday, USD/JPY showed some intraday swings but basically maintained a sideways trading pattern. The poor stock market sentiment caused the pair to reach an intraday low in the 88.80 area at the start of European trading. No follow through selling occurred and the dollar tried to regain some ground. The better than ex-pected US trade balance and a constructive open of the US stock markets helped USD/JPY to set an intraday high in the 0.8990 area. However, this move also lacked a strong momentum and USD/JPY close the session at 89.38; little changed from the 89.22 on Monday.
This morning, Japanese machine tool orders showed a steep 71.9% Y/Y decline. Japanese equity market closed marginally higher, but other Asian markets (and the US futures) record bigger gains. A Japanese business lobby urged the government to intervene in the currency markets if the yen keeps rising. However, this pleading shouldn’t come as a big surprise.
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. 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. We continue to prefer a sell-on-upticks approach. How-ever, 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 0.8715 reaction low. ST players may even consider partial profit taking in case of return action towards the 2008 low and look the reinstall the position in case of a USD/JPY rebound (e.g. if stocks would enter calmer waters again).
On Tuesday, market sentiment turned again more sterling skeptic. This is still very much an order driven market, but a series of poor UK data (BRC retail sales, RICS house price balance and later also the trade balance) probably was also a factor be-hind this change in sentiment. EUR/GBP set an intraday high in the 0.9120 area around noon. Later, some consolidation kicked in. However, this shouldn’t be con-sidered as sterling strength as EUR/USD remained under pressure during most of the US trading session. We also keep an eye at the UK government bond markets as yesterday’s sterling decline went hand in hand with an underperformance of the UK government bonds vis-à-vis German bond. EUR/GBP closed the session at 0.9092 compared to 0.9020 Monday.
At the start of 2009, pressure on sterling eased and this trading pattern was ex-tended 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, the price action this week illustrated that sterling sentiment remains fragile, too. Sentiment could remain EUR-skeptic ahead of Thursday’s ECB interest rate decision and press conference. Nevertheless, we hold on to our longstanding sterling negative bias 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 the 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 and we consider the recent EUR/GBP decline as corrective in nature. Over the pre-vious days, we kept a short-term wait-and-see approach as we were looking for the correction to fizzle out. Yesterday’s price action points in that direction. In day-to-day perspective, we reinstall a cautious buy-on-dips approach (0.9047 paints the neck-line of a ST double bottom). A sustained return below the previous high (0.8663) would question our long-standing sterling negative attitude.
