Next report will be on may 25th
On Tuesday, EUR/USD rose for the second consecutive session, following some corrective action last week. Overall, the dollar shows renewed signs of weakness. The dollar index dropped again to recent lows (82.099) which threatens to translate in a bearish double top formation and might lead to an acceleration of the dollar fall. However, confirmation is needed. The improvement in equity sentiment is playing havoc with the dollar. US equities digested well the disastrous US housing starts and even if intra-day gains were given back at the very end of the session, mood seems still improving. The VIX index of fear fell below 30% for the first time since the Lehman demise and messages that some US banks are considering paying back the TARP money and the UK government might soon sell its stake in the nationalized banks shouldn’t be overlooked. Of course equities still face a mighty technical resistance (943/978) looming, but should this be taken out the greenback may be hardly hit.
Intra-day, EUR/USD showed its current “usual” trading pattern. Following sideways trading in Asia, the pair resumed its ascend at the start of European trading, as equities rallied and the German ZEW economic sentiment index continued to increase (in May). The extent of which surpassed expectations, reaching an intra-day high at 1.3657. Following a pause, EUR/USD started to lose height, helped by sagging equities that reacted negatively on weaker-than-expected US housing starts. The reaction function that the dollar gains when bad figures affect adversely equities was once more confirmed. Later on, US equities recouped losses and even eked out gains, turning the direction of EUR/USD and pushing the pair to an intra-day high of 1.3668, before closing at 1.3632, a 70 tick’s daily from Monday’s 1.3562 close.
Today, the US eco calendar is empty, but attention might go to a testimony of Geithner on TARP and the Minutes of the April 29 FOMC meeting. It will be interesting to see whether Geithner will elaborate on the issue of repaying TARP money by the banks. The Minutes should show how the debate on QE evolves. The Fed decided not to announce an upping of its policy at that meeting, understandable as its measures are not yet all implemented. However, yields are still way higher than after the QE policy was announced initially. It is interesting to follow the discussion inside the FOMC on this point. Signs the Fed considered already an expansion of its program would be a dollar negative, as would be a positive opening of Geithner to the repayment of TARP money. The EMU calendar doesn’t contain marketinfluential releases.
The ST outlook remains euro positive as long as the pair stays above 1.3404 (broken 200 day moving average). The longer-term outlook remains euro positive as long as above the 1.2886 level (April low). We might see in the next few sessions an attempt of EUR/USD to break the 1.3738 resistance. A break might be very significant from a technical point of view, but will probably be linked with more signs of a healing in the global economy and a break higher of (US) equities. For that, some eye-catching eco data or event is needed, which probably won’t appear today.
Global context. Over the previous months, currency markets were driven by various factors, but the swings in risk appetite/risk aversion were the dominant ones. Bad news was often dollar supportive. The euro received a better bid when investors turned more risk-minded. This pattern was a few times interrupted by Central Bank initiated swings that were only temporary in nature though. Longer-term, the execution of the quantitative easing policy in the US remains a risk factor for the US bond markets and for the US dollar. EUR/USD sentiment is affected by several conflicting influences, but recent euro gains are encouraging. The more gradual ECB approach on quantitative easing compared to the BoE and the Fed is a LT supportive factor for the single currency, as is a better global economic outlook. However, technical considerations made us think that the EUR/USD couple needed some consolidation/ correction following recent gains and last week such a correction occurred. It didn’t go far though and the couple seems on its way for a test of the key 1.3738.
On Tuesday, USD/JPY couldn’t extent its gains from Monday that were driven by stronger equities, Moody’s rating action and official warnings that yen strength was unwarranted. With equities keeping up reasonable well, one could have expected more yen losses, but that didn’t happen. On the contrary, USD/JPY closed at 95.97, down from a 96.30 close on Monday. While the move is insignificant, it is disappointing for the dollar bulls.
Overnight, the Japanese Q1 GDP showed an unprecedented non-annualized 4% drop. While it was still better than the 4.3% shrinkage expected, it remains a shock. Exports collapsed and consumer and businesses slashed spending. The forwardlooking markets took it into stride; also because it is very likely that the economy will improve further out. However, from the authorities’ point of view, it will strengthen their conviction that a yen rise is unwarranted. Of course, a further improvement of global risk appetite would help them prevent such a yen strengthening. Nevertheless, if that is not enough or should sentiment change again, authorities will up their rhetoric against such a strengthening. Vice Finance Minister Sugimoto gave a first shot before the bow on Monday.
Global context. Over the previous months, the yen lost part of its safe haven status as markets grew more concerned on the Japanese economic performance. Nevertheless, an improvement in global investor sentiment in March supported a second USD/JPY up-leg and the pair tested the key 100.55/102.20 resistance area. Sustained gains beyond this area proved to be difficult and a technical correction sent USD/JPY to a 95.63 reaction low at the end of April. A renewed dollar rally failed to breach the previous highs and caused dollar selling this week that took the USD/JPY pair to a 94.55 level overnight. The key support level was extensively tested recently with a new ST low at 94.55, but reaction occurred bringing the pair again in the range. However, there was no follow through action and the pair is still hovering, undecided around key support levels.
On Tuesday, EUR/GBP had again a difficult time and tested key support level at 0.8765, but couldn’t break it (yet?). The Sterling rally got a shot in the arm, as a FT article reported that the UK government was contemplating an early sale of its stake in the nationalized banks. If successful, it would of course mean that the healing in the banking sector is proceeding faster than generally thought. The fast drop in the Libors, especially dollar but also Sterling and euro, of course supports the view that the credit crisis may be well over its top. Sterling would probably in pole position to gain the most given the importance of the sector for the country. The pair closed at 0.88075 versus the previous close at 0.88354.
The EMU calendar is uneventful and while the ECB will hold a non-monetary policy meeting, we shouldn’t get some info from it (via speeches) today. In the UK, the CBI industrial trends (May) will be scrutinized for signs of improvement, as the results in the previous months didn’t show some noticeable progress in recent months. The BoE Minutes of the May meeting probably won’t contain much news, as the inflation report has been published since and the BoE governors have testified. Nevertheless, the report might be interesting as the BoE expanded its QE at that meeting, which caused a negative reaction on Sterling at that time. We put forward range trading in the 0.8765 to 0.9156 range at the start of the week and stick to this. However, the technical picture is interesting as the pair is testing again an important support area. A sustained break below our range (0.8765) would paint a double top formation on the charts and open the way for an eventual test of the 0.8663 level, which is really key and if broken changes the longer term outlook in favour of sterling. Such a break cannot be ignored and will require us to change our view.
Global medium term context. After a forceful rebound in March, EUR/GBP was 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). The UK budget announcement and the weaker than expected Q1 GDP, again brought the fragile situation of the UK economy in the spotlights. However, the subsequent EUR/GBP rebound didn’t show strong momentum and the pair again tested the 0.8787 previous low. In a longerterm perspective, we have been advocating for quite some time that a sustained rebound of sterling was premature. In this respect, we take some comfort from recent price action after the ECB and BoE interest rate decision and the failure to drop below key support. The combination of a rather aggressive QE approach by the BoE and a much more cautious approach by the ECB should continue to give the euro downside protection against sterling, at least in a short-term perspective. Short-term the pair develops in a sideways trading pattern between 0.8765 and 0.9156 in which we don’t expect a change short term.
