On Monday, a flaring up in investors risk aversion at the start of the new trading week triggered the usual mechanisms in the currency markets. Selling EUR/USD (and even more EUR/JPY) was an almost evident trade in this market. The ongoing decline in the oil price pointed in the same direction. Most other stories, including the market talk on potential G8 ‘action’ with respect to the dollar’s role as major reserve currency had hardly any impact on currency trading. The decline on the European stock markets caused EUR/USD to give up almost one big figure during the morning session in Europe. Resurfacing pressure on the (European) banking sector due to some negative individual stories might have added to the euro negative sentiment. However, the stock market decline slowed and the initial losses on the US stock markets were much less compared to what happened in Europe. A better than expected US ISM for the non-manufacturing sector gave stocks and EUR/USD downside protection. Later in the session most US stock market indices even managed to recoup the earlier losses and EUR/USD in step did the same. The EUR/USD cross rate closed the session at 1.3984, little changed from the 1.3980 close on Friday evening.
Today, the eco calendar is again rather thin. In the US only some second tier weekly data are on the agenda. In Europe, the German May factory orders will be published. We expect any market reaction to these data to be limited and short-lived. In the current environment, a negative figure might have slightly more impact (on the euro) than a positive surprise. After the close of the European markets, the US 3-year auction will be in the focus. However, auctions of ST paper recently were not that much of a problem. So, the outcome of this auction shouldn’t a big issue for the dollar.
So, once again one can not but come to the conclusion that stocks will continue to set the tone for EUR/USD trading. In this respect, the S&P (which we mostly use as the reference for stock market sentiment) is coming close to the 875 support area. A break below this level would signal a further deterioration in global investor sentiment and would contain the risk of another downleg in EUR/USD, too. Of course, the debate on the dollar as reserve currency will most probably heat up in the run-up to the G8 meeting that will start tomorrow in Italy. Already for quiet some time, several emerging market countries including Russia and China are trying to open a discussion on this issue. It might be put on the table at a joined meeting of the G8 with five emerging market countries. The headlines on this G8 meeting might create some dollar nervousness, but we don’t expect this to become a ‘big issue’ anytime soon. Global investor sentiment will probably remain the main driver for EUR/USD trading. In this respect, we have the impression that markets are not really that confident going into the earnings’ season that will start at the end of this week/early next week.
Global context. During the month of June, EUR/USD kept a sideways trading pattern. Global investors turned again more cautious on the strength of a potential economic recovery and this capped the ascent in EUR/USD. However, the dollar was also not able to take the lead either. After all, the correction on the stock markets was rather muted. On top of that, any hopes that the Fed would raise rates rather soon proved not justified. From time to time, the debate on the status of the dollar as reserve currency resurfaced, causing temporary set-backs for the US currency. Regarding the European side of the story, we recently took notice of the fact that some ECB members had become more concerned that the ECB measures didn’t filter through enough into bank lending (cf supra). The ECB potentially moving further in the direction of new unconventional measures might, at some point, become a negative factor for the euro, too. However, at least for now, ECB’s Trichet didn’t give any signals that the ECB is preparing any additional unconventional policy steps to address this issue. This left the global picture for EUR/USD trading rather neutral and indecisive. None of those themes is currently able to set the tone for EUR/USD trading. So, the easiest option for EUR/USD traders remains to watch global investor sentiment and track the swings on the stock markets.
Looking at the technical charts, the EUR/USD currency pair settled in a sideways trading pattern between 1.3739 and 1.4338. Last week, the pair moved closer to the top of this range, but a real test of the 1.4338 level didn’t occur. Recently, we advocated that a break of this area would be difficult and maintained a sell-on-upticks approach. We hold on to that bias. More stock market weakness might open the way for return action to the range bottom at the 1.3750/39 area.
On Monday, USD/JPY (and even more EUR/JPY) again moved in step with the price action on global stock markets. USD/JPY trended lower throughout most of the Asian and European trading hours. The pair set an intraday low in the 94.70 area early in US trading. However, the (cautious) rebound on the US stock markets later in the session helped USD/JPY to regain part of the early losses. The pair closed the session at 95.35, compared to 96.04 on Friday evening.
This morning, there were no important eco data in Japan. Asian stock markets showed a mixed picture with hardly any outliers. USD/JPY is still slightly higher form yesterday’s lows, but little changed from the yesterday evening’s closing levels.
Global context. Since March, 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 still played a role, but is no longer as tight is it used to be some time ago. At the end of May, USD/JPY came relatively close to the key 93.54 range bottom, but a real test/break didn’t occur. The subsequent rebound ran into resistance ahead of the first resistance area (the early May highs). In a longer term perspective, this remains a range trading story. We expect the range bottom (MT reaction lows at 93.85/93.55). The intermediate support in the 94.75/95.00 area was tested yesterday, but no real break occurred. In a day-to-day perspective, we have the impression that markets are still a bit nervous ahead of the start of the earnings’ season. Longer-term, we maintain a buy-on-dips approach, but we still are not in a hurry to add to USD/JPY. We wait for signals that the correction on the stock markets is bottoming out before doing so. In this respect we continue to take a close look at the 875 area in the S&P.
Yesterday, at the start of trading in Europe, sterling came under pressure against the dollar and the euro. Cable dropping below the 1.6200/1.6180 support area/ST range bottom, probably triggered additional stop loss sterling selling. EUR/GBP temporary moved above the previous highs in the 0.8630 area, but again no sustained break occurred. Later in the session, an easing of the pressure on global markets also cooled the heat on sterling and EUR/GBP returned to the previous sideways trading range between 0.8400 and 0.8630. The pair finished the session at 0.8585, compared to 0.8560 on Friday evening.
Today, eco calendar contains the production data for the month of May. They are expected to stabilize (at a low level). Recently, sterling didn’t really react to positive UK eco data. So, we don’t expect those data to be a big support for sterling. Maybe there is some asymmetrical negative risk for the UK currency in case of a negative surprise. Investors will also look forward to Thursday’s BoE meeting. We expect the Bank to announce that it will execute the full amount of £ 150 billion of asset purchases that had already been agreed to by the government. However, some market uncertainty ahead of the meeting might limit the upside for sterling, even in case of good news.
Global context. During the month of May, sterling performed a remarkable rebound against the euro (and the dollar) supported by improving eco data. The break below the EUR/GBP level of 0.8637 was a clear signal that something had changed in investor sentiment towards the UK currency. We turned to a neutral approach vis-à-vis the UK currency. Nevertheless, there is still a lot of uncertainty on the BoE policy going forward (additional buying of assets?). On top of that, recent comments from BoE policy members gave the impression that they felt quite comfortable with a weak pound to support the economy.
Over the previous two weeks, the ascent of sterling ran into resistance. Apparently, enough good news had been priced in for sterling at the current levels. Nevertheless, sterling was rather resilient until now. Recently, we cut EUR/GBP short exposure and adopted a neutral bias for EUR/GBP. Regaining the 0.8605 area in a sustainable way would call off the ST alert in EUR/GBP and would be an indication that the EUR/GBP rebound could have some further to go. Over the previous days, several attempts of such a break failed. So, for now this remains a range trading story. Nevertheless, we have the impression that the downside in this pair has become better protected. We wouldn’t be surprised that a new attempt to break higher would succeed. A sustained break above the 0.8605/45 area could open the way for return action to the 0.8867 area (previous reaction high).
