On Wednesday, initially EUR/USD (and other USD cross rates) were locked into a tight sideways trading and neither EMU (IFO) nor US data (New Home Sales & durable orders) were able to give direction. The IFO survey disappointed slightly, while US data surprised on the upside. However, during the US trading session, USD traders’ nerves were tested in a brutal way. In a question-and-answer session after a public speech in New York, Treasury Secretary Geithner said he was ‘quite open’ on the suggestion from the governor of the Chinese central bank to increase the use of IMF’s specially drawing rights. In the current environment where the discussion on the status of the US dollar as reserve currency is heating up ahead of next week’s G20 meeting, this sent some shivers through the currency market. Investors initially interpreted the remark as an endorsement of the Chinese proposal to eventually replace the dollar as the world’s reserve currency by the IMF’s SDR’s. The dollar nosedived and EUR/USD spiked from the 1.3450 area to 1.3650. However, a few minutes later Geithner reaffirmed that he expected the USD to remain the reserve currency for a long time and he replicated these remarks in an interview on CNBC afterwards. The pressure on the dollar eased, but EUR/USD found a bottom and gradually moved higher again to close the session at 1.3583, well off intra-day highs, but nevertheless up from the 1.3468 close on Tuesday.
Today, the calendar contains the final Q4 GDP and the initial jobless claims, not immediately the strongest market movers, while in Europe only some second tier data are on the agenda. There is also again a very long list of Fed and ECB speakers and US Treasury Secretary Geithner testifies to a the financial regulation panel. We also look out for more tactical statements ahead of the G20 meeting.
Global context. After the euro correction since the start of the year, EUR/USD bottomed out since mid February. The market focus on the intra-EU tensions eased and last week the additional steps of the Fed toward quantitative easing triggered an aggressive USD sell-off. The USD correction eased this week and EUR/USD apparently is looking for a new theme to guide trading. Over the previous months, declining risk aversion in general supported the euro and was a negative factor for the dollar. However, EUR/USD didn’t make much progress on the positive global market reaction to the US toxic assets plan. EUR/USD even had to give back some of last week’s gains. In this context, we raised the question whether the guarded EUR/USD reaction on improved global investor sentiment would be an indication that markets gradually grow more confident that the US measures will put the US economy in pole position for an economic recovery. However, we are very cautious to trade this story as another potential market driver is appearing on the horizon: the early April G20 meeting and the role of the US as reserve currency. China raising question on the value of its dollar assets is part of this discussion. The key question for the dollar remains whether there stays enough a good reason for (major) USD investors like China to add to USD positions in a context of US quantitative easing.
This discussion makes us cautious on the US dollar, especially as long as there is no hard evidence yet that the US economy has found a bottom.
From a technical point of view, EUR/USD set a reaction low at 1.2457, 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 is not 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 Wednesday, USD/JPY slid into a sideways trading mode following some good dollar gains in the previous session. Also this morning, USD/JPY traded essentially sideways. The Geithner comments had some very temporary effect on the pair too yesterday, but were unable to give the pair direction. Geithner reiterated later on that the US favoured a strong dollar. USD/JPY closed the session at 97.54, marginally down from the previous close at 97.86. The pair trades currently slightly strongly at 97.96.
This morning, sideways trading continued. Asian bourses, including Nikkei, are trading positively, as hope grows that the deadly downward spiral in the US economy is running out of steam. This would favour once again the more cyclical currencies like the kiwi and the Aussie at the expense of the yen. In such a context the dollar may do better too versus the yen.
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.
After two days of a ‘technical’ correction sterling came again under pressure. The move started at the onset of European trading and would essentially continue to late in the session. The intra-day news flows supported the weakening of sterling fully. The UK 40-year Gilt action failed, triggering additional sterling losses. A few minutes later, the CBI distributive trade survey suggested that the better retail results in January and especially February foundered again in March. This triggered additional sterling selling throughout the afternoon. EUR/GBP closed the session at 0.93355 compared to a 0.9175 close on Tuesday, effectively erasing Tuesday’s gains. Some modest profit taking in EUR/GBP pushed the pair marginally lower in early trading today.
Today, the market looks out for the February UK retail sales. Additional negative eco news could add to sterling nervousness. The correlation between the retail sales and distributive trades (that was strong in February) has been far from convincing in recent months, making it difficult to position us on the outcome of the retail sales.
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 QE 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 but 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. This key support area looks rather well protected. So, we continue to feel confident with our buy-on-dips approach. A sustained break below the 0.9072/83 neckline would question our short-term EUR/GBP positive bias (Stop-loss).
