No change in the course of events on the currency market on Tuesday. The dollar continued to fight an uphill battle and this was again visible in the EUR/USD cross rate. There was a very limited correction at the start of trading in Europe as European stocks opened slightly lower, but a real USD comeback didn’t occur. On the contrary, during the morning session EUR/USD again showed a forceful spike higher. Global economic optimism still affected the underlying sentiment in this pair, but markets also focused on declarations from a US official, commenting on the agenda of BRIC meeting later this month. He indicated that the BRIC members may discuss the implementation of a supra-national currency. Those headlines were enough a reason for a next round of USD-selling. In two waves, EUR/USD regained the 1.4300 mark. Global markets reacting in a positive way to a better than expected US pending home sales release only added to the dollar negative sentiment. Good news, even if it comes from the US, is still seen a reason to sell the dollar. EUR/USD closed the session at 1.4303, compared to 1.4159 on Monday evening.
Today, the calendar in Europe contains the final reading of the services PMI’s and the details of the Q1 EMU GDP. The US calendar is also quite interesting, with the ADP labour market report, the ISM non-manufacturing and the factory orders scheduled for release. It will be interesting to see whether those series will confirm the trend of positive surprises as was often the case recently. Last but not least, Mr. Bernanke will testify before the house Budget Committee. In the current environment, it won’t be easy for the Fed President to bring a USD positive message. Hints that the Fed will raise the amount of asset purchases (and this print more money) hardly can be considered as dollar supportive. On the other hand, if the Fed president fails to do so, it might reinforce the sell-off on the bond market. On can raise the question whether this would be a US-supportive factor? So, a correction on the recent dollar sell-off, if it were to occur, probably should come from a change in global investor/stock market sentiment, rather than from a change in the assessment on the Fed policy going forward.
Over the previous weeks, market sentiment turned dollar negative. The euro continues to profit from improved global risk appetite. On top of that, investors have become less at ease with dollar long exposure as the Fed, in the minutes of the April meeting, kept the door open for more securities’ buying (some will say printing more dollars) if necessary. Mr Geithner in China tried to comfort China on its worries on the value of its Treasury holding. Both parties were friendly to each other, but at least for now, it didn’t bring any material support for the US currency. The swings in risk appetite/risk aversion remain the most important factor for EUR/USD trading in a day-to-day perspective. In a longer term perspective, uncertainty on the results/side effects of the aggressive monetary and budgetary approach in the US will probably continue to weigh on the US dollar or at least prevent a major comeback of the US currency. On the other hand, the EUR/USD currency pair is ‘gradually’ reaching a level that might become a reason for some nervousness on the competitive position of the euro-area, too. In this respect, markets will take a close look whether the ECB will address the value of the currency at is tomorrow’s press conference. We don’t expect much of this. We doubt that ECB is able to do anything about it, even if it would want to do so. ECB’s Constancio in a speech yesterday said that a pronounced depreciation of the dollar won’t happen as it is in nobody’s interest and as the consequences of such a decline would hurt economies across the globe. He is right, but probably coordinated action is needed to make this reasoning work in the markets.
The ST outlook remains euro positive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). The break above the intermediate high at 1.4051 only confirmed this picture. Long-term, we maintain our standing buy-on-dips approach. In a day-to-day perspective, we are not in a hurry to add to EUR/USD long exposure at the current levels and still look for a correction to do so. We are well aware that this strategy contains the risk to miss another up-leg, especially in case stocks (or for example commodities) would continue their rebound. The least one can say is that there is currently no reason to fight the strongly established EUR/USD uptrend. On the upside, the pair is coming close to a next high profile resistance area (December highs at highs at 1.4364 and 1.4719) and 1.4866 (September 2008 high). A break above this area would suggest that some kind of dollar panic is building.
On Thursday, USD/JPY joined the broader USD decline. Also, in this currency pair, the BRIC headlines pulled the trigger for an intra-day selling wave and the pair tested bids in the 95.35/50 area around noon. Later in the session, the pair temporary spiked higher after the better than expected US pending home sales, but the gains could not be sustained and the pair closed the session at 95.76, compared to 96.59 on Monday. Nevertheless, we still have the impression that the USD downside in this pair is better protected compared to other major USD cross rates.
Overnight, USD/JPY is slightly higher compared to the close yesterday evening. Asian stocks markets remain well bid. There were no important eco data in Japan this morning. BOJ member Kamezaki said he saw the pace of the Japanese economy’s’ deterioration easing but reiterated that downside risks for the economy remain high.
Global context. Over the previous weeks, USD/JPY developed a sideways trading pattern between 101.40 and 93.86/54 (May low/March low). The ‘traditional link’ between USD/JPY and the performance of global stock markets/risk appetite was no longer as tight is it used to be some time ago. Global dollar weakness was the name of the game. USD/JPY came close to the key 93.54 range bottom, but a break didn’t occur probably as markets fear Japanese (verbal) action in case of additional yen gains. For now, we think that technical considerations will continue to play an important role in USD/JPY trading. After the rejected test of the downside, we still see room for a correction higher in the established trading range. We maintain a buy-ondips approach as long as the bottom of the range 94.40/93.50 area holds.
On Tuesday, EUR/GBP (temporary?) entered calmer waters after the steep sterling gains on Monday. The eco data (lending data and construction PMI) were again better than expected but this time they had no lasting impact on trading. There even was a brief up-tick in EUR/GBP around noon as cable underperformed EUR/USD. However basically, EUR/GBP developed a sideways trading pattern and closed the session at 0.8629, compared to 0.8610 on Monday evening. At least for now, the turmoil on the UK political scene apparently is not really a big issue for sterling trading.
Overnight, nationwide consumer confidence came out better than expected and this helps the sterling to test the recent highs against the euro and the dollar this morning. Later today, markets will look out for the services PMI. A rebound above the 50 mark (the consensus expects and improvement from 48.7 to 49.5) might reinforce the sterling positive sentiment.
Recently, we considered the rebound in sterling to be still corrective in nature. In a long-term perspective sterling is probably undervalued against the euro, but we considered it too early to bet on a sustained sterling rebound. We saw the aggressive BoE QE policy (even extended at the previous BoE meeting) as a reason to stay cautious on sterling (for a similar reason we stayed dollar skeptic). We don’t see any change in the UK monetary policy assessment, but as we give much weight to the technical charts in our tactical approach, we couldn’t do anything else but drawing conclusions as EUR/GBP fell below the key 0.8637 level. This move forced us to leave our longstanding buy-on-dips approach in EUR/GBP to a sell-on-upticksstrategy. We don’t expect swift and forceful break lower. Nevertheless, the break below this level is a serious signal that something has really changed in the market sentiment toward the UK currency. Already last week, we advocated putting stoploss protection on EUR/GBP long exposure in case of a break below this level. We hold on view for now.
