On Tuesday, global markets faced a setback on the investor euphoria on the Geithner toxic asset plan that dominated the price action on Monday. However, already on Monday, the euro was not really in good shape as EUR/USD hardly made any gains on the back of a forceful stock market rebound. Apparently, there was still some hang-over from last week’s sharp EUR/USD rebound. On top of that, the stock market rebound shifted into a lower gear and triggered additional profit taking on EUR/USD long positions. The eco data (European PMI’s, US house prices and Richmond Fed index) all came out better than expected, but as usual had hardly any impact on the currency market. So EUR/USD drifted lower from the 1.3650 area early in Europe to test bids just below 1.35 at start of trading in the US. The pair then temporary settled in a sideways trading pattern but a new selling wave late in the session caused the pair to close the day near the intra-day lows at 1.3468, compared to 1.3633 on Monday evening. The debate on a global reserve currency as brought forward by China had no big impact on EUR/USD trading (cf infra).
Today, the calendar heats up with the German IFO business confidence and the US durable orders and new home sales. Recently, eco data most often had hardly any impact on the currency markets. Stocks and global factors (monetary policy items and financial rescue plans) set the tone for trading. Nevertheless, these data are rather timely and at least deserve a close look. We watch out whether better than expected/less negative eco data will have any positive impact on stocks and through this on the currency markets. The basic assumption remains that good news should be good for the euro, but we also take a close look at the price action, whether this trading pattern remains in place.
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 dollar took advantage from its safe haven status, despite ongoing bad new for the US. Since mid February, EUR/USD bottomed out and the additional steps towards quantitative easing as announced by the Fed last week triggered an aggressive USD sell-off. This week, the EUR/USD picture looks more balanced. EUR/USD hardly took any advantage from the positive global market reaction to the US toxic assets plan and yesterday the single currency joined the downward correction on the equity markets. So, for now EUR/USD apparently entered an era of consolidation. Earlier this week, we already raised the question whether the guarded reaction on the stock market rebound would be an indication that markets gradually grow more confident that the US measures will put the US economy 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. For now, we don’t play this view yet, but we stay open minded. In the current environment we continue to take a close look at the technical charts. On the other hand, the debate on the status of the USD as reserve currency could become a USD negative factor over time.
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 close to that area (1.3735) on Thursday. However, this 1.3735/1.3798 area apparently is not that easy to break. In a medium term perspective, we maintain a EUR/USD positive approach (buy on dips) as long as the pair holds above the 1.3330 area. A drop below this level would questions our positive bias.
On Tuesday, USD/JPY extended gains from the previous two sessions. A less buoyant global stock market performance and some further correction on the recent dollar decline were the most probable drivers. USD/JPY closed the session at 97.86, compared to 96.95 on Monday.
This morning, Japanese trade balance figures came out better than expected, but had no lasting impact on currency trading.
Ahead of the G20 meeting next week, the debate on the status of the USD as reserve currency heats up. China and Russia recently advocated a wider use of another reserve currency (SDR). In a congressional hearing and at a press conference, president Obama dismissed the need for a global currency and said that USD strength reflected the confidence in the US economic prospects. IMF officials indicated that discussion about a new reserve currency is not a short-term debate and that it underscores a general concern about the strength of the financial system. At least for now, the discussion has no visible negative impact on the dollar. However, it illustrates growing underlying nervousness and deserves close monitoring.
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 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 Tuesday, EUR/GBP extended to correction that started at the end of last week and the move accelerated yesterday. Global euro weakness in step EUR/USD was part of the explanation. Technical considerations (the pair dropped below the previous short-term lows) played a role too. The move also accelerated after the higher than expected UK CPI release. In normal circumstances, there is some logic for such a reaction. However, in the current environment, the reaction is a bit strange as the current uptick in inflation won’t change the BoE’s aggressive approach anytime soon. Nevertheless, BoE’s King yesterday said that the bank would raise rates quickly when the economy starts to pick up to keep inflation at bay. The key question is of course how far this point is still away? We also take notice that the rebound in sterling went in step a rather steep rise in UK yields, especially at the long end of the curve. Whatever the driver, EUR/GBP faced quite a setback and closed the session at 0.9172, compared to 0.9356 on Monday.
Today, the CBI distributive trade report is on the agenda. Last month, the report came out better than expected, but UK retail sales data recently often gave mixed signals.
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. The Bank of England taking ever more aggressive steps in its quantitative easing policy indeed triggered additional sterling losses. The break above the 0.9083/72 neckline made the MT technical picture for EUR/GBP again positive and opened the way for return action to the key 0.9519 reaction high. As this resistance came closer, the EUR/GBP shifted into a lower gear. We didn’t change our sterling skeptic bias yet, over the previous days we advocated that a technical correction lower in the established 0.9072/0.9520 trading range could be on the cards. We watch out whether this 0.9072/83 support area holds to step in/add to EUR/GBP long exposure. A sustained break below the 0.9072/83 neckline would question our short-term EUR/GBP positive bias (Stop-loss).
