On Thursday, EUR/USD again developed a rollercoaster ride and the drivers behind the individual swings were not always easy to assess. EUR/USD was under downward pressure in Asia and in early Europe. Risk aversion in step with a softer stock market open weighed on the EUR/USD cross rate. However, the pressure eased later in European trading. An awful (once again) German production figure had again no impact on trading. Buying pressure from EUR/GBP might have played a role in EUR/USD regaining the 1.28 barrier. However, the 1.2870 resistance area (recent highs) was not challenged yet. Later in the session, the GE downgrade and the SNB policy decision caused quite some nervousness in the major cross rates. The Swiss central bank indicated to implement FX interventions (selling CHF) as an integral part of their policy framework. The EUR/USD temporary declined on the back of those events, but the pair soon regained the upward momentum, propelled by a strong rebound on the US stock markets. This time, the 1.2870 hurdle was cleared and the pair closed the session at 1.2913, compared to a 1.2837 close on Wednesday. (Global) good news proves to be still good news for the single currency, too.
Today, the EMU retail sales, the US trade balance and the Michigan consumer confidence are on the agenda. Recently, eco data most often had hardly any direct impact on EUR/USD. We the have the impression that market grew a bit more sensitive to positive news. However, the impact from the data on EUR/USD will still be highly depended on the stock market reaction.
Global context. Since the start of the year, EUR/USD was on the defensive. Europe was seen more vulnerable to the global crisis. The deterioration of the European government finances and the widening intra-government spreads was seen as an illustration of the intra EMU tensions. In 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. The US side of the story has also been far from brilliant, but the dollar took advantage from its safe haven status. So global bad news most often was a negative for the euro, good news gave the single currency some downside protection. Over the previous weeks, the EUR/USD decline shifted into a lower gear but until now any attempt of the euro to regain ground immediately ran into resistance. Over the previous days, we indicated that a sustained change in the global negative sentiment is needed to give the euro some better downside protection. We don’t cry victory yet, but this week’s rebound in the stock markets at least interrupted the negative spiral that started early February. A better/less negative global market sentiment might also help EUR/USD to move somewhat higher in the established trading range.
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 dropped below the 1.2765/00 support area (previous low) and set a ST low in the 1.2457 area. However, a test of the key 1.2330 area didn’t occur. This week, the pair regained the 1.2754 previous ST high and the STMA and the MTMA are again turning to the upside. This could be a first indication that the pair is receiving a better bid. 1.2992 is next short-term resistance. A break above this level would open the way to the top of the sideways range in the 1.3330 area. In a day-to-day perspective we apply a buy-on-dips approach.
On Thursday, USD/JPY set and an intraday low in the 95.70 area early in European trading. Later in the session, the pair trended higher on improved global sentiment. However, the biggest intraday move in the pair occurred on the announcement of the SNB to sell CHF for foreign currencies. The yen lost quite some ground after this announcement. Investors apparently were looking for other currencies that could become involved in some kind of spiral of competitive devaluations. The yen was seen as one of them and USD/JPY and EUR/JPY moved higher on this news. USD/JPY rebounded to the 98.50 area and closed the session at 97.72, compared to 97.27 on Wednesday. Regarding this, market speculation on competitive devaluations after the SNB decision, we don’t think that the BOJ will walk the same way. USD/JPY is no longer at an extreme and such a move would receive heavy headwinds in the G7/G20. A trade war, which could be a result of such an escalation, is not in the interest of Japan either. In this respect, markets will look out for any reactions from the preparatory meeting for the April G20 summit, to be held this weekend in the UK.
This morning, final IP data and consumer confidence were close to expectations. The Japanese government promised to prepare a new economic stimulus package by early April and said it would inject public funds in three local banks. The Nikkei closed the session with a 5.15% gain. USD/JPY moved cautiously higher in Asian trading this morning.
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 the 90.00 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. Last month, we installed 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, opening the way for a corrective profit taking move. Next important resistance comes in the 100.55/102.20 (04 Nov high)/2nd target double bottom off 94.65). We turned neutral on USD/JPY as we have the impression that this resistance area will be tough to break in a first attempt. Yesterday’s rejected test of the downside is a ST positive. We hold on to a range trading strategy between 94.65 (neckline double bottom) and 100.55/102.20. In a day to day, perspective, USD/JPY could move somewhat higher in the mentioned trading range.
On Thursday EUR/GBP continued the uptrend from the previous days, but the move lost some momentum later in the session on the better global market sentiment. The implementation of a rather aggressive policy of quantitative easing also leaves its traces on the currency markets. After the BOE policy announcement, the Gilt yield in 5Y+ sector is now below the German/EMU yields. Yield differentials at this stage are not the most important driver for currency trading. However, they are no support for sterling either. EUR/GBP reached an ST reaction high in the 0.9315/20 area. The pressure on sterling eased later in the session and EUR/GBP closed the session at 0.9262, compared to 0.9253 on Wednesday. BoE barker in a speech defended the Bank’s shift toward quantitative easing. However, we didn’t see much new info for sterling trading.
Today, the UK eco calendar is again empty. From a market point of view, it will be interesting to see how the UK currency reacts to an improvement in global market sentiment, if it were to continue.
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 have got more market attention and have a negative impact on sterling. Over the precious sessions EUR/GBP moved above a downtrend line from the highs and on pair also cleared the more important 0.9085/9130 area, making the technical picture positive for now. In a day-to-day perspective, have the impression that the EUR/GBP rebound might shift into a lower gear. Nevertheless, we maintain our buy-on-dips approach. The 0.9519 reaction high is the next high profile resistance on the charts. Sustained return action below the 0.9085 support (previous high) would be and indication that the sterling negative market attitude is waning.
