On Tuesday, EUR/USD basically held a sideways trading pattern, with the intraday swings in investor/stock market sentiment the most important driver for trading. EUR/USD started in Europe in the 1.30 area, supported by the positive stock market performance in the US on Wednesday. However, the positive sentiment could not be maintained. European stocks gave up the early gains and this caused EUR/USD to do the same. The publication of the US housing data again illustrated the ‘order of safe havens’ among the major currencies. Awful US housing data and jobless claims triggered selling of the USD against the yen, but the dollar gained against the euro. Bad news, even if it comes from the US, is bad for the euro and less so for the dollar. Later in the session US stocks bottomed and market also kept an eye on the currency statements from Mr. Geithner. He repeated that a strong dollar is in the interest of the US, but also stepped up the debate on China as a currency manipulator. The debate left no big traces on EUR/USD trading, but the pair stabilized and closed the session in the 1.3001 area, little changed from the previous close on 1.3023.
Today, the US eco calendar is empty. In Europe, the advanced PMI’s will be published. The market expects further erosion from the indices to new cycle lows. Recently, the euro often felt some headwinds from high profile negative data. However, global market sentiment will continue to be the driver for trading.
Since the start of the new year, the currency market gradually gave more weight to negative news coming from the euro zone. The deterioration of the European government finances, pressure on the Sovereign credit ratings in Europe and the widening of intra-govie spreads became an ever more important factor for EUR/USD trading. The dollar has regained the advantage of doubt over the euro, especially in times of rising global market pressure. Over the previous two session EUR/USD showed some tentative signs that the downmove is losing momentum. However, intra- EU government bonds spreads continued to widen, and this factor recently was a negative for the euro. So, the jury is still out as to whether investors will tone down their euro-skeptic sentiment. Longer-term we remain skeptic on the chances for a protracted dollar rebound. In this respect, some interesting factors came to the forefront yesterday. ECB’s Bini Smaghi indicated that the ECB was reluctant to bring interest rates to very low levels, unless in the extreme situation of a risk for deflation and for inflation expectations to adapt to a scenario of very low inflation/deflation. We’re not at that point yet. On the other hand, the decline in US bond prices after the remarks from Geithner on China’s currency manipulation are a (limited) warning sign for the dollar, too. Of course, this is the long term debate on the fundamental value of the dollar (and the euro), not the short-term trading theme. However the debate still deserves the attention.
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, a forceful correction kicked in and EUR/USD dropped below the top of the previous sideways range (1.3300 area). This made the picture again neutral to short-term negative. In a day-to-day perspective, the ST downtrend channel still can be a guide for ST trading (cf graph). A sustained break above the channel top (Red line, today 1.3120 area) would improve the ST technical picture. A drop below the LT downtrend line (green line) from the highs would be an additional negative (cf graph). For now, the pair settles in a ST 1.2850/1.3100 trading range.
On Thursday, USD/JPY again mirrored the swings in global sentiment. After the rebound on Wednesday evening the pair moved sideways in the 89 area in Europe, but declined in US trading hammered by the poor US data and the poor US stock market open. However, the losses were recouped later in the session and the pair closed the session at 88.91, compared to 88.49 on Wednesday.
The US debate on currency manipulation is of course in the first place addressed to China. However, it doesn’t make things easy for Japan either incase they want to step into the market to slow the ascent of the yen. The Japanese finance Minister warned that the government would act promptly if necessary. This is of course a cat and mouse game between the Japanese authorities and the markets. Interventions might not be around the corner yet. It is doubtful that the BOJ will be able to buck the trend, but they will at least try to slow the rise of the yen in case of another sharp move.
The Nikkei lost again almost 4.0% this morning and USD/JPY slid to the 88.50 area.
Looking at the charts, global market stress and overall dollar weakness in the wake of the 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, but earlier this week the pair retested the lows. The longterm trend in the pair remains negative, but recently we warned that the downtrend might slow below 0.9000 (among others as Japanese officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8710/15 reaction low). Last week, we advocated at least partial profit taking on USD/JPY shorts in case of return action towards the 2008 lows and indicated that there could room for a ST correction/ rebound in USD/JPY. The momentum/technical picture remains yen positive, but we don’t feel comfortable to add/reinstall to yen long exposure at the current level. The risk for interventions might continue to cap the upside of the yen, especially against the dollar. We keep a wait and see approach and look for a more pronounced up-tick (caused by interventions or by something else) to add to USD/JPY short exposure.
On Tuesday, sterling continued to fight an uphill battle, but pressure was less heavy compared to earlier this week. EUR/GBP trended higher from the start of trading in Europe and set a new ST reaction high in the 0.9465/70 area after a very poor CBI industrial trends report. From there, some consolidation kicked in. At the end of the European trading session, Moody’s said the UK AAA rating was no weaker than that of other nations with the triple-A grade, despite the government’s bailouts for banks and economy-boosting measures. This caused a short-term rebound in sterling against the single currency. EUR/GBP closed the session at 0.9370 compared to 0.9327 on Wednesday.
Today, the first estimate of the UK Q4 GDP and the retail sales are on the agenda. The consensus expects a 1.2 % Q/Q decline in growth for Q4 and a monthly decline of 0.7% M/M for the retail sales. We don’t have good reason to take a different view from the consensus, but more negative news might add to the sterling negative sentiment.
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. Last week, the sterling rebound ran into resistance. The market reaction to the UK banking plan was an additional indication that the sterling rebound against the euro has run its course. The break above the 0.9130-neckline (double bottom) made the ST picture again sterling positive. Mid last week we reinstalled a cautious buy-ondips approach in EUR/GBP. The targets of the ST double bottom (0.9425) were met earlier this week. This might lead to some more consolidative price action short term. Longer term, we hold on to our established buy-on-dip approach.
