On Monday, EUR/USD was downwardly oriented in Asian trading and during the morning session in Europe. There were no important eco data on the calendar. However, stock markets at the start of the new trading week showed again a high degree of uncertainty/distrust. EUR/USD set an intraday low in the 1.2555 area at the start of US trading. At that time, financial newswires gave quite some attention to headlines from an interview with Warren Buffet as he said the US economy ‘has fallen of a cliff’. However, from that point the euro recouped part of the early losses. The rebound started after Mr. Trichet made some cautiously positive remarks in a briefing after the BIS meeting in Basel. On top that, markets pondered a series of remarks from ECB’s Stark and Bini Smaghi as they warned that the bank should be careful to slash rates, too low. He indicated that there remained room for further interest rate cuts, but that this will not fundamentally solve the problems that have the financial crisis. As usual, the direct link between those declarations and the EUR/USD price action is difficult to make. However, we have the impression that the ‘cautious’ ECB approach is no longer a real negative factor for the single currency. This is even more visible, we think, in the EUR/GBP cross rate. The EUR/USD rebound ran into resistance later in the session as US stock drifted into the red again. The cross rate closed the session at 1.2611, compared to 1.2653 on Friday.
Overnight, there were headlines from US treasury secretary Geithner as he defended the US policy approach as quick reaction to the crisis. In the press, there is also some debate that Europe ignores calls from the US from more aggressive budgetary measures to support spending. However, at least now this has no negative impact on the euro. EUR/USD rebounded above the 1.27 mark in overnight trading.
Today, the calendar contains a series of less important European eco data. In the US the wholesale inventories might get some more than average attention. There are also a lot of speeches from ECB members and, last but not least, Fed’s Benranke will speak on banking regulation. Those speeches can yield some interesting headlines, but global (stock) market sentiment and technical factors will continue to set the tone for EUR/USD trading also today.
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 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. As long as this context persists, a sustained euro rebound is not evident. Nevertheless, we have the impression that the downside in the pair has become better protected (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 1.2754 reaction high could be a single that correction/rebound has some further to go (toward the 1.2992 reaction high). In a day to-day perspective, we slightly prefer a buy on dips approach.
On Monday, USD/JPY was well bid in line with other dollar cross rates. Global market uncertainty at the start of the new trading week combined with rather poor Japanese eco data supported the USD/JPY uptrend. The pair reached an intraday high in the 99.15 area early in US trading. US stock markets failed to develop a clear trend and the USD/JPY shifted into a lower gear. The pair closed the session at 98.84, compared to 98.25 on Friday.
This morning, Japanese eco data (machine tool orders, leading indicators) painted again a bleak picture from the Japanese economy. The Japanese finance Minister indicated the government intends to take decisive action to support the stock market and the economy, if necessary, at the expense of higher bond issuance. The Nikkei closed the session with a loss of 0.44%.
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-dips 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 Monday, EUR/GBP preformed quite an impressive rebound. The euro was a bit better bid overall. On the other hand, sterling came again in the eye of the storm. The growing involvement of the UK government in the financial sector (Lloyds agreement announced on Sunday, fears that other banks will be forced to take similar action) and uncertainty in the longer-term impact of the BoE’s aggressive shift to a policy of quantitative easing hammered sterling. Monday’s change in the outlook on the HSBC’s holing rating from stable to negative was an additional cause of concern. EUR/GBP move north throughout the whole trading session almost without any interruption and closed the session at 0.9153 compared to 0.8978 on Friday.
Overnight, the RICS house price balance declined again from a revised -77 to -78. The BRC retail sales declined 1.8% in February, reversing a 1.1% gain in the previous month. These data add to the sterling negative sentiment this morning. Later today, the UK production data will be released.
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 remained sterling cautious. Until the end of last week sterling weathered the quantitative easing debate rather well. However, the BoE taking an ever more aggressive approach in its quantitative easing and the growing government involvement in the financial sector apparently get more market attention and have a negative impact on sterling. Yesterday, we indicated that EUR/GBP moving above a downtrend line from the highs was a cautiously positive signal. The pair also clear the more important 0.9085/9130 area, making the technical picture positive for now. We reinstall a buy-on-dips approach in this pair. The 0.9518 reaction high is the next high profile resistance on the charts.
