On Monday, all eyes were on the details of the US plan to address to problem of toxic assets on banks’ balance sheets. Even if the execution of the plan and the success ratio are far from clear, the market this time gave Mr. Geithner the advantage of the doubt. Stocks rallied and for the first time in a long period of time, one could have the impression that global investors grow more confident that this plan might change something for the better going forward. Recently, overall good news and stock markets gains mostly were a supportive factor for EUR/USD. However, this time EUR/USD didn’t succeed any sustained gains. Some market analysts see this as an indication of ongoing underlying market skepticism on the potential success of the plan. However, with stock market gains of 6%+ in the US, we don’t join this analysis. On the contrary, it could be a tentative sign that markets ponder whether this could be a turning point and whether the US economy might have made a first, cautious step towards some kind of financial and/or economic stabilization. Of course, the jury is still out on this interpretation. However, it remains remarkable that the dollar, recently seen as a safe haven, holds up well on this era of declining risk aversion. Whatever the reason, after some intraday swings, EUR/USD closed the session at 1.3633, only slightly higher compared to the 1.3582 close on Friday.
This morning in Asia, stocks build out the rally in the US yesterday evening and EUR/USD trades a few ticks higher compared yesterday’s close. Also interesting, in a speech Fed’s Lockhart defended to new Fed measures (buying treasuries).
Today, the first estimate of the European PMI’s will be published. There is a long list of central bankers from all major central banks that will speak at different occasions. In the US the Richmond Fed manufacturing index will be published. The European PMI are an interesting piece of information, but the market sentiment after yesterday’s ‘euphoric’ reaction will continue to set the tone for trading and other markets, including the currency market.
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, the widening of intra-government spreads and fears that the deepening of the crisis in Central and Eastern Europe might cause a new adverse loop for the European economy were a negative factor for the euro. The US side of the story has also been far from brilliant, but the dollar took advantage from its safe haven status. Over the previous weeks, EUR/USD bottomed out and last week’s Fed decision really changed the course of events in EUR/USD. Quantitative easing and artificially low interest rates, in theory are no support for a currency, especially not for the currency of a country with an external deficit. The dollar faced some serious headwinds at that time. However, at the start of the new trading week, the picture for EUR/USD looks more balanced. The positive global market reaction to the US toxic assets plan gives EUR/USD downside protection, but nothing more than that. So, at least for now it looks as if the easiest part of the euro gains is behind us. Yesterday, we already indicated that it would be interesting to see whether markets gradually grow more confident that the current US measures will put the US in pole position for the economic recovery. The jury is still out whether this will indeed become the new market theme and whether this will become a USD supportive factor. We don’t play this view yet, but we stay open minded.
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 set a ST low in the 1.2457 area, but a test of the key 1.2330 area didn’t occur and a gradual rebound took place. The forceful move after the Fed announcement last week, catapulted the pair again above the 1.3330 range top. The picture remains EUR/USD constructive as long the pair holds above this area. Already for some time, we have a euro positive bias and last week we put forward 1.3798 (2008 high) as potential next target. The pair came already rather close to that area (1.3735) on Thursday. For now, we hold on to our EUR/USD positive bias. However, the 1.3735/1.3798 area apparently is not that easy to break. Short-term players might consider partial profit taking in case of a retest of this area.
On Monday, the dollar showed quite a decent performance despite decline global risk aversion and this was also visible in USD/JPY. The pair performed a gradual uptrend throughout most of the day and closed the session at 96.95, a gain of more than one big figure compared to the close of 95.94 on Friday. However, this move probably should in the first place be considered as yen weakness. The return of investor risk appetite sparked buying in several cross rates (AUD/JPY, EUR/JPY,…).
This morning, Japanese/Asian stock markets extend the rally seen in the US yesterday evening. The Japanese finance Minister also said that it was important to use the nation’s foreign currency reserves for currency market stabilization. This illustrates the underlying the debate on the role of the US as reserve currency and it also contains an implicit (albeit soft) intervention warning. However, this morning’s USD/JPY gains in the first place mirrors the improved stock market sentiment.
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. Since mid January, the pair even made a decent rebound that accelerated in February. 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. However the really ran out of steam just ahead of the 100 mark. We turned neutral on USD/JPY as we had the impression that the 100.55 resistance area would be difficult to break in a first attempt and adopted a range trading strategy in the 94.65/100.55-102.20 trading range. The pair temporary dropped below 94.65 (previous reaction high), but the test was rejected and since Friday morning, USD/JPY showed quite a forceful rebound. For now, we hold on to our range trading strategy. However, sentiment for USD/JPY (and for a lot of other yen cross rates) obviously has improved and retest of the 99.69/100.55 might be on the cards.
On Monday, EUR/GBP more or less tracked the EUR/USD trading pattern. So, contrary to the recent price action, declining risk aversion this time was a (slightly) positive factor for sterling. Order driven, asymmetrical price action in cable and EUR/USD also caused some intraday jitters in EUR/GBP. The pair closed the session at 0.9356, compared to 0.9389 on Friday. Yesterday, there was quite some debate in the UK on the necessity of additional fiscal stimulus. PM Brown continues to support additional measures, but his call was not supported by the CBI. Later in the session, BoE’s Blanchflower also painted a grim picture on the UK economy. However, his aggressive approach is not really big news for markets.
Today, the UK CPI is on the calendar. Recently, inflation data in other industrialized countries often came out slightly higher than expected. However, we don’t expect this to be a key factor for the currency market. Several BoE members appear before the House of Commons Treasury Elect committee. This can yield some interesting headlines.
Global Medium term context. At the start of 2009, EUR/GBP made a forceful correction after the steep sterling losses mid-December. A first rebound ran into resistance in the 0.95 area. Another forceful correction caused the pair to test the high profile support (0.8663 area previous high) but the test was rejected. From a fundamental/ LT point of view, we remained sterling cautious as we consider the BoE approach a potential risk factor for sterling. This was also visible after the latest BoE meeting. The Bank of England taking ever more aggressive steps in its quantitative easing policy and the growing government involvement in the financial sector had a negative impact on sterling. The break above the 0.9083/72 neckline made the MT technical picture for EUR/GBP again positive. Recently, we had a buy-on-dips approach. The pair cleared the 0.9320 and 0.9420 resistances. This opened the way for return action to the key 0.9519 reaction high. As this resistance comes closer, the EUR/GBP shifted into a lower gear. We don’t change our sterling skeptic bias yet, but a technical correction lower in the established 0.9072/0.9520 trading range is possible. A sustained break below the 0.9072/83 neckline would question our shortterm EUR/GBP positive bias.
