On Tuesday, EUR/USD again showed some remarkably swings. The single currency had lost almost two big figures during the Asian trading session due to rumours of a rescheduling of Russian bank and corporate debt. However, Russian authorities denied the intention to set up such a plan. The euro rebounded during the morning session in Europe and at the start of trading in the US, EUR/USD reached an intraday high in the 1.3075 area. This was a bit surprising as investors were rather reluctant to add positions in other riskier asset classes already ahead of Treasury Secretary Geithner’s announcement of additional measures to support the financial system. The initial Stock market reaction to the ‘new’ plan was negative and this also dragged EUR/USD lower. Markets apparently were disappointed as the plan lacked details on the next steps to address the financial crisis. However, given the sharp decline on the US stock markets, the correction in EUR/USD was not excessive. Euro optimists might even be inclined to call this euro resilience. Whatever the assessment, EUR/USD weathered yesterday’s turbulence rather well. The pair closed the session at 1.2913, compared to 1.3003 on Monday.
Today, a few US trade data are on the agenda. The trade balance is expected to improve further from a deficit of $ 40.4 bln to $ 35.7 bln. However, US trade data recently most often had no lasting impact on currency markets. The focus for EUR/USD trading will again be on the market assessment of the US plans to address the financial and economic crisis. In this environment markets will again take a close look at another Testimony Mr. Geithner before a Senate budget Panel.
Since the start of the year, EUR/USD was on the defensive. The deterioration of the European government finances and the widening intra-government 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 yesterday). The US eco story was also far from brilliant, but the dollar most often 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. Yesterday’s intraday volatility on the US/Geithner plan only is an illustration of the indecisiveness in the currency markets. In this environment we do not front-run on a major EUR/USD up-leg.
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. EUR/USD remains locked in a sideways trading pattern.
On Tuesday, USD/JPY first settled in a sideways trading range, roughly between 91.00 and 91.50. However, global investor disappointment on the US/Geithner plan for the financial sector caused renewed safe haven flows to the Japanese yen. USD/JPY closed the session at 90.47 compared to 91.46 on Monday.
Today, Japanese markets are closed for the National foundation holiday. USD/JPY lost further ground this morning on going market uncertainty/risk aversion after negative market reaction to the US financial sector plan. According to a Bloomberg Article, Chinese authorities are looking for ‘guarantees’ on the value of its US (of course USD denominated) Treasury portfolio/reserves. This ‘guarantee’ debate also brings the US commitment to a strong dollar policy again in the picture.
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 was a signal that the yen positive momentum might be waning. It is much too early to call off the era of yen strength and yesterday’s market reaction to the Geithner plan again supported the yen. However, we consider the yen gains not really excessive, given the steep US stock market losses. Over the previous days we advocated that, if global market sentiment would become less risk averse, there might be room for a more pronounced rebound in USD/JPY and we installed a cautious buy-on-dips approach. Yesterday’s price action didn’t go our way, but for now we don’t change tactics yet. The 94.65 reaction high is the first high profile point of reference on the charts.
On Tuesday, EUR/GBP reached a correction low in the 0.8637 reaction low in Asian trading. However, the sterling could not hold on to its gains. There was profit taking both on sterling longs (cable) and on euro shorts (EUR/USD). This propelled EUR/GBP to the 0.88 area early in US trading. A negative assessment on the UK economic situation from former BoE policy maker Wadhwani and a pleading to rapidly cut interest rates to zero might have added to the sterling negative sentiment. UK trade balance data were better than expected but had not lasting impact on sterling trading. Later in the session, the market disappointment on the US financial plan caused some additional sterling losses; EUR/GBP closed the session at 0.8878, compared to 0.8727 on Monday.
Today, UK calendar contains the labour market data and the BoE quarterly inflation report. The latter will be quite interesting. Markets will look for indications on next policy steps for the period when conventional rate cuts are no longer possible. However, with still some room left to cut the base rate, it might be a bit too early for any specific news on this item.
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/ LT point of view, we remain sterling skeptic. Yesterday, EUR/GBP tested/temporary dropped below the 0.8663 area (previous high profile high). However, the test was rejected. The pair even rebounded above the 0.8840 Neckline. This rebound calls off the short-term alert in EUR/GBP and makes the picture neutral again.
