On Monday, currency trading mirrored the global uncertainty linked to the swine flu outbreak. At this stage, the impact of this event on the world economy is almost impossible to asses. However, it was a factor of global uncertainty and the currency market has some kind of standard procedure to address this kind of uncertainty. Euro weakness is part of this procedure, especially as there was room for profit taking after the euro rebound at the end of last week. So, EUR/USD slid south throughout most of the day. There was an additional selling wave after the close of the European markets. The move came as the headlines from a speech of ECB’s Nowotny hit the screens. He didn’t bring high profile new info but said that euro zone interest rates will stay low for some time and that the Bank is ready to use unconventional measure of quantitative easing if necessary to ensure access to credit. Both Nowotny and also ECB president Trichet indicated that any specific measures will be announced on May the 7th. The uncertainty on the swine flu spreading and the ECB comments caused EUR/USD to close the session near the intraday lows at 1.3036, compared to 1.3242 on Friday evening.
Today, the eco calendar contains the US consumer confidence release, the CS house prices and the Richmond Fed manufacturing index. European markets look out for the first regional CPI data (Germany). After the European close, ECB’s Bini Smaghi speaks on ‘conventional and non-conventional monetary policy’. On top of that, the US stress test story continues to spook the market with press article rumours suggesting that some major US banks might still need additional capital. This is also a factor of uncertainty which tends to weigh on the single currency and is of course also the case for additional negative news headlines on the swine flu outbreak and its potential negative effect on stocks and on global investor sentiment.
Global context. Over the previous months the currency markets were driven by very different factors. The swings in risk appetite/risk aversion were a dominant factor on almost all markets and the currency market was no exception to this rule. Bad news was most often dollar supportive. The euro (more or less in step with other non-safe haven currencies) received a better bid when investors turned more courageous. This underlying pattern was a few times interrupted by the central bankers. Mid March, the dollar faced a sharp temporary setback after the Fed’s announcement to extend its policy of quantitative easing. However, those dollar fears dissipated rather soon. After the early April ECB press conference, the euro came again under pressure as investors scaled back euro long position as there was growing uncertainty on the non-conventional measures the ECB intends to announce at the May meeting. Markets suspected some internal disagreement within the ECB board on this item. At the end of last week, it looked as if this ECB market theme had run its course and the euro even performed a nice rebound, supported by better than expected EU sentiment indicators. At the start of this week, a new spike in risk aversion caused EUR/USD to give up most of last week’s gains. In a day-to-day perspective, we have the impression that the euro will continue an uphill battle as long as the key market themes of late (swine flue, US stress tests, ECB policy) continue to play a dominant role.
From a technical point of view, EUR/USD set a reaction high at 1.3738 mid March after the Fed meeting but soon profit taking kicked in. The bottom of the 1.3090- 1.3113/1.3738 trading range was broken and EUR/USD set a new ST reaction low just below 1.29 last week. Last week’s rebound above the 1.31 area proved not sustainable. In this context we continue to see the short-term risks for EUR/USD to the downside. Nevertheless, the least one can say is that there is not really a consistent trading pattern to guide the price action in this currency pair.
On Monday, USD/JPY was under some (slight) downward pressure, with global uncertainty on the potential impact of the swine flu outbreak on the economy the major driver for investors scale back holdings in high yielding currencies and returning to the yen. However, after all, the stock market losses were not really excessive and this was also the case for the gains of the Japanese currency, especially if measured against the dollar. The gains against the euro and the Aussie or kiwi dollar were much more outspoken. USD/JPY closed the session at 96.77, compared to 97.17 on Friday.
Overnight, Asian stocks remained under pressure. Next to the impact of the swine flu, uncertainty on the outcome of the US stress tests weighs on markets and keeps the yen well bid. Japanese retail sales data as published this morning were weak, but close to expectations.
Global context. Over the previous months, the market gradually came to question the safe haven status of the Japanese currency and grew more worried on the performance of the Japanese economy. This hurt the yen’s safe haven status and triggered a USD/JPY rebound. An improvement in global investor sentiment during the month March supported a second up-leg and the pair tested the key 100.55/102.20 resistance area. Additional/sustained gains beyond 100.55 (04 Nov high) and 102.20 (2nd target double bottom) proved to be difficult. We turned more cautious on USD/JPY and advocated partial protection/profit taking on USD/JPY long positions. The pair dropped below some short-term support levels. The fall below 99.31 painted a short-term double top formation on the charts and the pair also dropped below the MT uptrend line from the January low. This makes the ST technical picture negative. For now, we don’t row against the tide and continue to put the risk for the correction to go further. 93.54 (19 march reaction low)
On Monday, sterling reversed part of last week’s losses. The combination of a technical rebound in sterling and overall euro weakness caused EUR/GBP to develop a steady decline throughout the whole trading session. The impact of last week’s negative UK headlines (budget, GDP) faded and also market talk on the UK potentially losing its AAA rating moved to the backstage. There were no important eco data and also the BoE Asset purchase Facility Quarterly Report brought no high profile market news. EUR/GBP closed the session at 0.8994, compared to 0.9027 on Friday evening.
Today, the CBI distributive trades are scheduled for release. On top of that, the DMO will auction a 2022 bond (3bln). Recently, the auctions of LT paper often didn’t go that easily and, in a daily perspective, a poor auction result might also have some negative impact on the UK currency.
Global medium term context. The EUR/GBP pair extensively tested the key support area (0.8663/37 area previous high) early February, but the test was rejected. However, the subsequent rebound also failed to take out the key 0.9519 resistance area and since mid march, EUR/GBP was again captured in an ongoing downtrend. At some point, it even looked as if the pair was heading for a test of the key 0.8637 area. However, mid April, the sterling rebound ran out of steam (Reaction low in the 0.8787 area). Last week the UK budget announcement and the weaker than expected Q1 GDP again brought the fragile situation of the UK economy in the spotlights. EUR/GBP moved away from the recent lows, calling off the short-term downward alert in this pair. In a longer-term perspective, we hold on to our view that it is too early to expect a sustained rebound of sterling. Short-term, the pair might settle in a consolidation pattern between 0.8787 (reaction low) and 0.9156 (neckline). We slightly prefer a buy-on-dips approach in case of return action to the lower end of this consolidation pattern.
