On Thursday, most major USD cross rates, including EUR/USD, entered calmer waters after some nervous market swings recently. During the morning session in Europe, EUR/USD hovered in a sideways trading pattern between 1.3550 and 1.36. The pair trended cautiously higher early in US trading. The US data (GDP revision and jobless claims) were rather close to expectations and had no lasting impact on the EUR/USD price action. Trading was very much technically and order driven. Inability to hold above the 1.36 area caused intraday players to look at the other side and the pair returned to the opening levels. In the financial press, there were again quite a series of articles on the status of the US dollar has reserve currency and/or ideas (mostly from Russia or China) on a substitute for this dollar function. However, the debate was not at a high profile level enough to have a lasing impact on the EUR/USD price action. On the contrary, the dollar even gained some further ground later in the session even as US stock performed well. However, recently the link between EUR/USD and the equity markets was already less strict compared to what it used to be some time ago. EUR/USD closed the session at 1.3526, compared top 1.3583 on Monday.
Today, eco calendar contains the personal income and spending data and the final Michigan consumer confidence. In Europe, the industrial orders and the first German CPI data are on the agenda. However we expect that global market themes like the G20 meeting, the sustainability of the recent stock market rebound or additional policy steps (banking sector or additional US measures to support the auto industry) will continue to set the tone for trading. Especially the discussion on need to review to status of the USD as reserve currency and/or the possible options it extend the US of the SDR as reserve currency will continue to figure on the trader pages going into next week’s 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 towards quantitative easing triggered an aggressive USD sell-off. The USD correction eased this week and EUR/USD is apparently 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. 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 and extremely low US interest rates. 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. Any change in the role of the US dollar is a reserve currency won’t occur overnight. However, the discussion as such only can be considered as dollar negative.
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 Thursday, USD/JPY developed a perfect, almost uninterrupted intraday uptrend throughout yesterday’s session. Ongoing constructive investor sentient triggered buying in most yen cross rates, including USD/JPY. In a context of receding risk appetite, investors apparently tend to prefer the dollar over the yen. The discussion on the USD as reserve currency left no traces on USD/JPY trading, at least not yesterday. USD/JPY closed the session at 97.71, compared to 97.54 on Wednesday evening.
This morning, USD/JPY had to return part of yesterday’s gains. Asian stocks trade mixed despite the strong close in the US yesterday evening. Japanese inflation data brought no major surprises, but indicate that Japan is still very close to deflation. Retail sales data came out weaker than expected, too. This morning USD/JPY correction is seen as (end-of-week) profit taking on recent gains. Some caution on yen shorts ahead to the end of the fiscal year might have played role, too.
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 USD negative, but the downtrend ran out of steam below the 90.00 area. Later, 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. As the pair comes again closer to the recent highs, short-term player can look to lock in some profits.
On Thursday morning, sterling tried to regain some of Wednesday’s losses. However, the move ran into resistance soon. Poor UK retail sales were a good reason to halt this move and EUR/GBP turned north again after the publication of the release. The sale of government bonds also gets quite some attention these days, especially after a poor 40-year auction on Wednesday. Yesterday, the UK Treasury sold 2022 inflation bonds and contrary to the failure on Wednesday this auction received a strong bid. The two operations were of course of a completely different nature. Nevertheless, from a currency point of view one can raise the question whether investor preference for inflation linked bonds over fixed coupon assets is a positive signal for the currency. Some say this could be seen as some kind of motion of distrust on the BoE inflation commitment over time. Whatever the assessment on the IL auction, its success was no support for sterling. On top of that, the financial press still elaborated on the ‘rift’’ between BoE’s King (who recently voiced caution additional stimulus) and Prime Minister Brown (who wants some additional commits at the G20). EUR/GBP closed the session at 0.9358, compared to 0.9335 on Wednesday.
Today, the final Q4 GDP data and the current account data will be published. The first one might get some media coverage, especially in case of a downward revision, but in fact it is old news. UK Prime Minister Brown (visiting Brazil) reiterated that the UK must not rule out taking action needed to boost growth. However, at this stage we don’t have the impression that this debate is really a support for the UK currency.
Global Medium term context. At the start of 2009, EUR/GBP in several steps, made a forceful correction after the steep sterling losses mid-December. The pair extensively tested the key support area (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 aggressive BoE QE approach a potential risk factor for sterling. 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 and even gave up some of the recent gains. Nevertheless, we don’t change our standing sterling skeptic bias yet. The key 0.9072/83 support area looks rather well protected. So, we continue to feel confident with our buy-on-dips approach with the 0.9520 area still the next high profile level on the charts. A sustained break below the 0.9072/83 neckline would question our short-term EUR/GBP positive bias (Stop-loss).
