On Friday, EUR/USD faced quite an aggressive set-back. The move started early in European trading. At that time we didn’t see a clear trigger for this move. Initially it was cable that took the lead in this move but the stop-tripping soon spilled over in EUR/USD and later in the session EUR/USD was hit even harder than was the case for cable. Market talk mentioned to the poor EU industrial order data and the decline in German inflation. Some mentioned a warning of German finance Minister Steinbrueck that the euro might be hurt if European budget rules are not applied. Others also referred to a speech of ECB’s Papademos as he discussed potential ECB buying of corporate paper. If the latter would indeed come true, it would be an important step of the ECB and then the market reaction would be quite logical. However, the ECB vice president just kept the option open and at this stage, we are not really convinced that the ECB is indeed close to such a change in its policy. Nevertheless, the euro met heavy selling pressure and EUR/USD dropped below the key 1.3330 support. The slide on the US stock market (rise in risk aversion) was also no help for the single currency and EUR/USD closed the session at 1.3275, quite a steep loss compared to the 1.3526 close on Thursday.
Today, the eco calendar in the US is empty. In Europe, the EU commission confidence indictors are scheduled for release. Even more interesting, ECB Trichet speaks at the EU parliament on economic and monetary affairs. In the wake of the sharp decline of the single currency on Monday, any signs of the ECB considering additional unconventional steps (including the buying of CP and corporate bonds) could be high profile news for the single currency. As indicated, such a step is not our favorite scenario. Nevertheless, the market is apparently very sensitive to this item. In the US, the rejection of the turnaround plan of GM and Chrysler could become a source of global market uncertainty. Last but not least, markets and the financial press will keep the spotlights on the G20 meeting that will take place later this week. However, we have the impression that the focus in this debate is a bit moving away from the dollar. In a short-term perspective, this could be (slightly) dollar supportive.
Global context. After a gradual 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 two weeks ago the additional steps of the Fed towards quantitative easing triggered an aggressive USD sell-off. However, this USD sell-off was rather short-lived, despite the discussion on the role of the USD as reserve currency ahead of the G20 meeting. This was/is a disappointing performance from a EUR/USD point of view. 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 either.
In a longer term perspective, we were and remain cautious on the USD, especially as long as there is no hard evidence that the aggressive fiscal and monetary measures in the US had put the floor for a sustained improvement in US economic activity. On top of that we still question 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. However, short-term, we can’t ignore the steep decline in EUR/USD on Friday. Rising uncertainty for several reasons (cf supra) is apparently still a good reason for investors to scale back/take profit on EUR/USD long positions. More negative global headlines can cause this correction to go somewhat further.
From a technical point of view, EUR/USD set a reaction low at 1.2457 early March, 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 above the 1.3330 range top, making the ST picture EUR/USD positive. However, the rebound ran into resistance ahead of the 1.3798 previous high. Profit taking kicked in and on Friday, the pair fell again in the previous sideways range, making the picture for EUR/USD again neutral. This forced us to leave our ST euro positive bias. In a day-to-day perspective, the correction even might have some further to go. We wait for signals of a bottoming out of this process to reconsider buying at lower levels.
On Friday USD/JPY reversed most of Thursday’s gains. In this respect, USD/JPY decoupled from most other major USD cross rate. Selling pressure on other major yen cross rates (GBP/JPY, EUR/JPY) and technical considerations (the pair was again close to the top of the established trading range) are the most obvious explanations for this move. The correction on the stock markets might have played a role, too. However, given the recent market skepticism on the yen, we don’t really believe that the yen is already regaining its safe have status. Of course, there is also the usual end of year repatriation talk. USD/JPY closed the session at 97.86, compared to 98.71 on Thursday.
This morning, the correction continues. Japanese February industrial production continued its negative trend from the previous months (-9.4% M/M and 38.4%). However some firms see a chance of a pick-up in production as inventories have dropped to very low levels. Asian stocks show rather steep losses at the start of the week (profit taking?) and this apparently supports the yen at this stage.
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.
On Friday, sterling started the session on a weak footing and EUR/GBP even temporary traded above the 0.94 mark. At that time, selling pressure in cable was said to drive this move. However later, the EUR/USD pair declined even faster than cable and the global euro weakness triggered profit taking in EUR/GBP, too. The UK data (Final GDP and current account were not really inspiring) and had no lasting impact on EUR/GBP trading. EUR/GBP closed the session at 0.9280, compared to 0.9359 on Thursday.
This morning, UK Hometrack house prices declined 0.6% M/M and 10.3% Y/Y. Later today, the UK lending data will be published. In the financial press, there is quite some attention for some declarations from George Soros as he didn’t exclude that the UK at some point might need IMF support, even if this scenario is still considered as a possibility, not a likelihood.
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).
