On Friday, the euro found a better bid overall and this was also mirrored in the EUR/USD headline pair. Technical considerations probably played a role. In the second half of last week, the dollar ascent ran already into resistance. EUR/USD failed to sustain below the 1.25 handle and similar resistance for the US currency was seen other USD cross rates. A lot of market talk on an awful payrolls figure was also a good reason to scale back USD long positions. The payrolls came out close expectations. However, markets apparently were prepared for the worst. Stocks and EUR/USD tried to gain some ground after the payrolls, but the move had no strong legs and EUR/USD turned south again later in the session. The pair closed the session at 1.2653 compared to 1.2540 on Thursday evening. So, after all, the Friday price action only confirmed the directionless trading pattern of late.
Today, the calendar is almost empty, both in the US and in Europe. So, currency trading will once again look for guidance to the stock markets and to the global financial developments. With respect to the latter, the BIS meeting might provide some interesting headlines. There are some press articles this morning on a BIS paper that warns for shortages of USD funding for British and European banks. This funding shortage was seen as an explanation for the recent dollar strength at times of elevated market stress. Those headlines can have an impact on EUR/USD sentiment short-term. However, the gyrations on the stock market will continue to be the most evident factor.
Global context. Since the start of the year, EUR/USD was on the defensive. Europe was seen more vulnerable to the global crisis and less flexible in addressing the fallout from the financial turmoil. The deterioration of the European government finances and the widening intra-government spreads was seen as illustration of intra EMU tensions and fuelled the euro-negative sentiment. On top of that, the euro remained a gauge of global risk aversion. The BIS analysis (cf supra) might support this thesis. The US story has also been far from brilliant, but the dollar took advantage from its safe haven status. Since mid January, the EUR/USD decline shifted into a lower gear but any attempt of the euro to regain ground immediately ran into resistance. Mid February, market fears that the deepening of the crisis in Central and Eastern Europe might cause a new adverse loop for the European economy and its financial sector caused EUR/USD to drop below the 1.27 support. This illustrated to euro skeptic sentiment. A change in the global negative sentiment is needed to give the euro some better downside protection. Such a trigger is apparently not yet available. By default, the gradually euro downtrend persists. Nevertheless, we have the impression that the downside in the pair is also becoming more difficult (no new ST low at the end of last week). A tentative sign of a bottoming out process?
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 tested several times the 1.2765/00 support area (previous low) and the break of this area deteriorated the picture for the single currency and brought the 1.2330 area again in the picture (2008 low). A break below the 1.2330 area would signal more trouble for the single currency. For now this is not our preferred scenario. We remain neutral short-term. Range trading in the 1.2457/1.2992 range is preferred. A break above the latter is needed to see a short-term improvement in this pair.
On Friday, USD/JPY (in line with a lot of other USD cross rates) faced some profit taking. Uncertainty on the outcome of the US payrolls report apparently was a good reason to scale back some USD long exposure. Technical considerations probably played a role too (disappointment on Thursday’s inability to recapture the 100 threshold). The payrolls were rather close to expectations and helped the US currency to recoup the earlier losses later in the session. USD/JPY closed the session at 98.25 compared to 98.07 on Thursday evening.
This morning, the first monthly Japanese current account deficit in 13 year receives quite some attention in the financial headlines, but after all it had only a limited impact on yen-trading. The Nikkei continues to fight an uphill battle. The index lost again 1.21% and closed the session at a 26year low.
Global context. Looking at the charts, USD/JPY set a reaction low in the 87.15 area in December. Since then, the pair entered calmer waters. The long-term trend in the pair remains negative, but the downtrend ran out of steam below 0.9000 area. Recently, the pair even made a decent rebound that accelerated over the previous two weeks. The underlying yen-momentum obviously has weakened. The market questioned the safe haven status of the Japanese currency and grew more worried on the performance of the Japanese economy as faltering exports clouded the eco picture. Over the last two weeks, we had a buy-on-dip approach in this pair. The break above the key 94.65 resistance improved the ST picture further. At the end of last week, the USD/JPY rebound lost momentum, but correction was short-lived. The next important resistance comes in the 100.55/102.20 (04 Nov high)/2nd target double bottom off 94.65). We turn neutral on USD/JPY as we have the impression that this resistance area will be tough to break in a first attempt.
On Friday, EUR/GBP moved higher in choppy trading. We didn’t see much in the way of news flow to explain the move and suspect it to be primarily order driven. Global euro strength played a role too. However, later in the session, sterling came under additional pressure. Recently we took notice of fact that the currency markets largely ignored the debate on quantitative easing. On Thursday, sterling hardly reacted to the BoE announcement and to the consecutive steep decline in LT Gilt interest rates. On Friday, UK yields moved further south and this time sterling apparently felt some headwinds from the sharp decline in UK yields. EUR/GBP closed the session at 0.8978, compared to 0.8882 on Thursday.
Today, the UK calendar is empty. The UK financial press in dept covers the agreement between the government and Lloyds to cover £ 260 bln of assets. The government’s stake in the group will also be raised to 75%. There is no one-on-one link of this story with the sterling, but we still see the ever growing involvement of the government and the BoE as an (slightly) sterling negative factor.
Global Medium term context. At the start of 2009, EUR/GBP made a forceful correction after the steep gains mid-December. A first rebound ran into resistance in the 0.95 area and another forceful correction even caused the pair to test the high profile support (0.8663 area previous high) but the test was rejected. The subsequent rebound called off the short-term alert in EUR/GBP and made the picture neutral again. From a fundamental/LT point of view, we remain sterling cautious. However, we have to admit that for now sterling has weathered the quantitative easing debate rather well. In a day-to-day perspective, the EUR/GBP pair tries to move above a downtrend line from the highs. This is a cautiously positive signal. However, the pair needs to hold above the 0.9085/9130 area in a sustainable way to really improve the picture.
