EUR/USD started the week on strong footing. This was remarkable as there were no key eco data on the calendar. On top of that, most other markets, including the stock markets, were in a wait-and-see mode after last week’s gains and ahead of more news on the US economic and financial plans. Nevertheless, in technically inspired trading, EUR/USD gradually moved higher throughout the session and reached an intra-day high in the 1.3090 area around the open of the US stock markets. Yields at the short end of the European yield curve were a few basis points higher. However, with markets focused on measures to kick-start economic activity (and not on interest rate support for the currency), we don’t think that this should be considered a support for the euro. Later in the session the EUR/USD momentum waned. Uncertainty on the specific content of the Obama plan dampened over all investor enthusiasm. Nevertheless, EUR/USD still closed the session with a decent gain at 1.3003, compared to 1.2940 Friday evening.
Overnight, a press article that Russian Banks and businesses would ask for a rescheduling of $400 bln in (foreign) debt caused a lot of market nervousness. This story weighed on the single currency and EUR/USD came again under pressure overnight, setting an intraday low in the 1.2810 area. The pair is traded in the 1.29 area at the moment of writing.
Today, the US eco calendar is again rather thin. Markets will continue to look out for the details of the Obama Plans to support the economy and the financial sector. Regarding the latter, the working out of the bad bank idea remains subject to a lot of uncertainty. Later in the session, both Fed’s Bernanke and Treasury Secretary Geithner speak on the financial rescue plan and on measures to support lending. The credibility of those measures will be a key factor for global sentiment and thus indirectly also for EUR/USD. The debates on Russia and on intra-EMU tensions still deserve attention, too.
Since the start of the year, the EUR/USD continued to fight an uphill battle. The deterioration of the European government finances and the widening of intragovernment spreads weighed on the single currency. In a broader perspective, negative headlines on the development of the credit crisis most often had a negative impact on the euro (cf Russia headlines). The US eco story was also far from brilliant, but the dollar took advantage from its safe haven status. Over the previous two weeks, the EUR/USD decline shifted into a lower gear but any attempts to change the trend immediately ran into resistance. Longer-term, we’re not convinced that the dollar should outperform the euro from the current levels. However, already for some time, the market clearly has a euro skeptic attitude. Even some factors that could be seen as euro supportive (narrowing intra euro government bond spreads, improvement in global sentiment) until now were not able to change the course of events in favour of the euro. So, even as EUR/USD shows some tentative signs of bottoming out, the indecisive EUR/USD trading pattern remains in place. In this environment we do not front-run on a major EUR/USD up-leg. Uncertainty on Russia could be another good reason to cap the short-term upside for EUR/USD.
From a technical point of view, the correction from mid December brought EUR/USD again in the previous sideways range (capped by the 1.3300 area). The pair extensively tested the 1.2765 support area (previous low) with a reaction low/fast break at 1.2706. The test was rejected but the subsequent rebound was (again) disappointing. A sustained drop below the 1.2765/00 area still contains the risk for return action to the 1.2330 area (2008 low). A sustained rebound beyond the previous ST highs 1.3100 area and even more above the 1.3330/85 area (MT reaction highs) is needed to improve the ST EUR/USD picture. Last week’s multiple test of the downside suggests that the downside in this pair has become a bit better protected. However, for now the pair obviously lacks any directional momentum.
On Monday, USD/JPY basically developed a sideways trading pattern. The pair reached an intraday high in the 90.90 area before the start of trading in Europe. However, this dip was soon reversed and the pair settled in the mid 91 area. Stock market moves were too small to give the pair any clear guidance. USD/JPY closed the session at 91.46 compared to 91.89 on Friday.
This morning, Japanese consumer confidence came out close to expectations. Japanese officials gradually start their positioning for the G7 talk to be held this weekend in Rome. However, for now the FX comments are still very moderate/soft. Despite a series of factors of uncertainty (US plans/Russia) Asian stocks hold up rather well. USD/JPY lost some ground early in Asian trading this morning, but soon reversed the earlier losses.
Looking at the charts, USD/JPY set a reaction low in the 87.15 area on December 17. Since then, the pair entered calmer waters. The long-term trend in the pair remains negative, but the downtrend slowed below 0.9000 (amongst others on fears Japanese officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8710/15 reaction low). On Thursday of last week, USD/JPY did break out of a short-term consolidation pattern. This is another indication that the yen positive momentum might be waning. It is much too early to call off the era of yen strength. Nevertheless, if global market sentiment would become less risk averse, there might be room for a more pronounced rebound in USD/JPY. At the end last week, we changed our short-term neutral bias for USD/JPY and installed a cautious ST buy-on-dips approach. The USD/JPY rebound is not really spectacular, but we maintain this bias for now. The 94.65 reaction high is the first high profile point of reference on the charts.
On Monday, sterling extended its gains against the euro. There were no high profile data on the UK or the European eco calendar. However, the positive market reaction to the Barclays’ results was a support for the UK currency. EUR/GBP set an intraday low in the 0.8685/80 area around noon. Later in the session, the overall rebound in the single currency and EUR/GBP even temporary returned to the intraday highs in the 0.8775 area and closed the session at 0.8728, compared to 0.8752 on Friday.
Today, UK calendar contains the trade balance figures. Recently, the trade data still showed hardly any improvement despite the decline in sterling. This morning, the UK data were mixed. The BRC retails sales came out better than expected. The RICS house price balance deteriorated further from -74% to -76%. We wouldn’t link this morning’s GBP price action to those UK data, but sterling extended its recent rebound, especially against the euro. Euro weakness (Russia) probably was a big part of explanation of this move (are UK based banks not involved in Russia financing?).
On the technical charts, the break above a series of high profile resistance levels in November/December made the long term technical picture positive for EUR/GBP. At the start of 2009, EUR/GBP made a forceful correction. EUR/GBP tried to recapture the longstanding uptrend, but the pair ran into resistance in the 0.95 area. This lower high on the charts pulled the trigger for another forceful correction and the pair finally dropped below the key 0.8840/00 neckline/support area. This high profile technical signal obliged us to give up our short-term EUR/GBP positive bias. From a fundamental point of view, we remain sterling skeptic. However, in a short-term perspective, we can’t ignore the technical signal(s) in several sterling cross rates. The euro continues to fight an uphill battle while the scaling back of sterling shorts is gaining momentum. So, short-term players can try to play this technical break. A sustained drop below the 0.8663 area (previous high profile high, currently under test) would reinforce the short-term sterling positive picture. Long term, we still consider the current move as corrective in nature, but for now this is no good reason enough to fight the short-term EUR/GBP downtrend trend.
