On Monday, the correction on global markets that started on Friday continued and the currency market was no exception to this rule. Investors took profit on riskier currencies and assets like stocks and commodities and part of these flows returned to the USD. So, EUR/USD was traded in the 1.40 area early in Asian trading yesterday morning, but soon the pair was captured in a firmly established downtrend. This move lasted until late in US trading in step with deepening losses on the stock markets. Risk aversion was again de dominant theme for EUR/USD trading. On the news wires, there was also a lot of talk on the comments from the Russian Finance minister on the sidelines of the G8 meeting as he expressed his confidence in the dollar as reserve currency. Nevertheless, we think that this factor was only of second tier importance to explain yesterday’s price action. The eco data (Empire manufacturing and Tic data) hardly had any impact on USD-trading. EUR/USD closed the session at 1.3803, compared to 1.4016 Friday.
Today, the US eco calendar contains the PPI data, the housing starts and permits and the industrial production data. We especially take a look at the housing data. Last month, those data came out again very week. Question is whether an improvement this month, if it were to occur, would be able to change the global trend, for example on the stock markets. This is highly doubtful. In Europe, markets will watch out for the ZEW economic confidence and the details of the EMU CPI. A speech of Fed’s Warch on economic policy during the US trading hours also deserves some attention. However, in line with yesterday’s price action, any reaction on the currency markets to one of those items will probably go via the stock markets.
Aside from the data, currency traders will also stay alert for headlines from the BRIC summit in Yekaterinburg. Some negative headlines on the status of the dollar as reserve currency are still very well possible. However, after the recent more balanced statements from Russia, the market apparently has drawn the conclusion that nothing fundamentally will change anytime soon.
Over the previous weeks, market sentiment was dollar negative and the euro took profit from improved global risk appetite. On top of that, there was still quite some uncertainty about next steps in de Fed policy and about the fiscal situation in the US. After the payrolls, it looked as if markets might have shifted their attention to the pace of the recovery in the US and its potential impact on the Fed policy. However until now, other data were not really strong enough to support this thesis and also the Fed strategy remains subject to a high degree of uncertainty. Do they really consider an early rate hike? While they still expand the program asset buying? So, at least until now, uncertainty on those items remained too high and the dollar failed to develop a clear (positive) trend. In this context, EUR/USD traders continued to watch investor sentiment (as mirrored in stocks and even more in commodities) as the most important guide for EUR/USD trading. Nevertheless, we stay alert as to whether the dollar indeed might become more sensitive to positive US eco data. In a longer term perspective, a credible Fed exist strategy would easy the pressure on the US currency.
After the US payrolls report and the raise in short-term US interest rates, we changed our EUR/USD bias from positive to neutral. For now, we hold on to that view. If the correction on the stock markets would go somewhat further, the dollar might gain some more ground against the single currency. Of course, this is a negative, rather than a positive choice in favour of the US currency.
Looking at the technical charts, the medium term outlook remains euro constructive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). After the payrolls quite a forceful correction occurred, but the move stalled before the first support at 1.3793 (reaction low). This level was temporary broken yesterday evening and this morning but the key 1.3739 (previous reaction high) support area was not really challenged, yet. Nevertheless, the picture in EUR/USD is becoming heavier and a break below the 1.3739 area would further cloud the picture in this pair. In a day-to-day perspective we had a sell-on upticks approach. We hold on to that bias.
On Monday, USD/JPY traders didn’t really know which side to go. The accelerating decline on the stock markets and rising investor’s risk aversion are ambiguous signals for the USD/JPY currency pair as both currencies claim the status of save haven in stormy financial weather. However, as stock markets losses mounted, the balance gradually tipped in favour of the yen. USD/JPY drifted cautiously lower throughout the session and closed the day at 97.84, compared to 98.43 on Friday.
Overnight, Asian/Japanese stock markets stocks continued to join the correction on global markets. At its policy meeting, the BOJ upgraded its economic assessment. Some tentative signals from exports and output fueled hopes that the worst of the recession is over. However, they obviously haven’t reached the point yet to consider implementing an exit strategy from the extraordinary measures anytime soon. The Japanese finance minister reiterated its strong confidence in the dollar. However, this time this vote of confidence was no really a big help for the US currency. The unwinding of carry trades in the commodity currencies apparently is a much bigger support to the yen than to the dollar. So, USD/JPY faced heavy selling pressure this morning and swiftly dropped below the 97.08 neckline.
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, even as the dollar losses in this cross rates were rather limited. USD/JPY came close to the key 93.54 range bottom, but a break didn’t occur and USD/JPY returned higher in the medium term trading range. Higher short-term US interest rates could also be a support for the dollar against the yen. Last week, trading in this pair was rather indecisive, but the downside looks rather well protected. Over the previous sessions, we had a ST buy-on-dips approach. However, the break below the 97.08 neckline suggests that the short-term momentum in his pair deteriorated. So, the yen might gain some further ground as long as the global stock market correction persists. Nevertheless, we expect the range bottom (93.86) to hold.
On Monday, it looked as if sterling would remain more or less immune to the correction on global markets. Cable showed some signals of topping out, but the losses of sterling against the dollar were again less compared to the decline in EUR/USD. So, EUR/GBP set a new short-term low in the 0.8450 area early in US trading. The CBI’s assessment on the UK economy (a slight decline in growth in Q2 and Q3 and growth only seen restarting in 2010) was mixed, but markets again took it from the positive side. EUR/GBP closed the session at 0.8457, compared to 0.8520 Friday.
Today, the UK eco calendar contains the May CPI data. Today, the UK will sell 25- year Gilts through syndication.
Recently, we were a surprised by the force of the rebound in sterling. 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. However, 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. We turned to a neutral approach vis-à-vis the UK currency. We don’t expect a swift and forceful break lower in EUR/GBP. Nevertheless, the break below this key support level is an important signal/confirmation that something has changed in market sentiment towards the UK currency. The pair setting new ST reaction lows only reinforced this feeling. There is no reason to fight the established downtrend yet, but we tend to think that enough good news for sterling is priced in at the current levels. Recently, we had a ST sell-on-upticks approach in this pair. ST players might consider profit taking on the recent sterling rally. The pair regaining the MTMA (today at 0.8598) would be an indication that the sterling rebound has run its course for now.
