The jury is still out, but in retrospect, Tuesday might have been an important day for trading on the currency markets. Recently, the dollar showed already signs that some pressure was building, but until yesterday, no key levels were broken in most major USD cross rates. However, this happened yesterday. There was not one obvious trigger ‘to explain’ yesterday’s USD sell-off, but a lot of USD cross rates were at important technical levels and this offered a good excuse to try some stop tripping. The UNCAD annual report advocating the use of a new multi-currency reserve system brought the issue of the dollar’s status as reserve currency again in the spotlight. On top of that, the auctions of US government bonds scheduled for this week apparently were considered a good barometer for global investor interest (or the lack of it) in USD denominated assets. Last but not least, the spike higher in gold (and in other commodities) early in European trading was also a negative factor for the dollar. None of those factors was really new info for the markets, but this time the mix was enough to draw their conclusions and to test whether there was room to start of new trend. EUR/USD broke above the 1.4450 range top already before noon in Europe and this high profile break kept the dollar under pressure for the remainder of the session. The pair set intraday highs in the 1.4530/35 area after the close of the European markets, but the rally stalled. The US 3-year auction going well eased pressure on the US currency and EUR/USD closed the session at 1.4478, compared to 1.4332 Monday. It would not be correct to describe yesterday’s move as dollar panic, but some kind of red alert on the dollar has been raised. This signal is also visible on the charts of the trade weighted dollar index as it dropped to new year lows.
Today, the calendar is again rather thin. In Europe, only some second tier eco data are on the agenda. In the US, the Fed Beige book preparing the next policy meeting will be released. Markets will also take a close look at the auction of the 10-year US bonds.
Global context. Since early June, the EUR/USD currency pair had been locked in a sideways trading pattern. Recently, there were encouraging signs that the worst of this crisis might be over. However, the Fed and the ECB recently indicated that the current stimulating monetary policy will remain in place for an extended period of time. So, interest rate expectations/interest rate differentials do not offer a clear guide for EUR/USD trading and this probably won’t be the case anytime soon. By default, swings in risk appetite/risk aversion were the most obvious alternative to guide the price action on the currency markets. In this context, a decline of the dollar was often considered as a signal of improving global investor sentiment. This trading theme has had its merits in understanding the rebound of the euro (and several other currencies) during the early phase of the global (stock market) rebound. However, recently, the market focus gradually turned more to dollar weakness, rather than strength of the other major currencies including the euro. The huge US financing needs together with the Fed’s intention to run an expansionary monetary policy for a pronged period of time have put the dollar in a vulnerable position. We don’t see this environment changing anytime soon.
Looking at the technical charts, the EUR/USD currency pair set a minor new high in the 1.4448 area early in August, but at that time no follow through price action occurred. Yesterday’s break above this level improved the picture for EUR/USD. Recently we advocated not to front-run on a break above this level, we be put stop-loss protection the cover a break of this key area. The 1.4719 December high is now the last area of defense. A break above this level would open the way for an acceleration of the USD sell-off. The jury is still out, but we avoid to dollar long exposure. The risk obviously is for EUR/USD to test this high profile level on the EUR/USD charts.
On Monday, USD/JPY joined the broad sell-off of the US currency. A positive start of the Asian and European stock markets was not enough to prevent some additional gains of the yen against the US currency. On the contrary, the spike higher in gold early in European trading pulled the trigger for a USD/JPY sell-off, too. The pair dropped from the 92.80 area to the low 92 area. However, the decline slowed and the key 91.94/73 area was not challenged. Nevertheless, the pair still closed the session with a decent loss at 92.2, compared to 93.08 on Monday evening.
This morning, Asian stocks are captured in a (moderate) profit taking move. However, at least for now this doesn’t cause any additional losses for USD/JPY. Japan’s July leading indicator showed a further improvement, confirming the trend of the previous for months.
Global context. USD/JPY reached a short-term reaction high in the 97.80 area early August. However, despite a positive global investor sentiment the US currency could not hold on to its gains against the yen. This indicated underlying dollar weakness. Often, there is still some kind of (intraday) link between USD/JPY and the swings in global investor risk appetite and risk aversion. However, the link has become somewhat asymmetric. Recently, USD/JPY hardly gained on a strong stock market performance while negative stock market corrections (or even a slowdown in the rise of the stock markets) continued to support the yen. We had a sell-on upticks approach for USD/JPY. However, as the pair came close to the key 91.73 support we advocated profit-taking on USD/JPY short positions. Longer term, we don’t expect a strong rebound of the USD dollar against the yen. So, this remains a sell-on-upticks environment. Return action to the 95.00 area would be a good opportunity to go USD/JPY short again. However, such a move is far from evident now. The short-term reaction high at 93.30 now is the first technical resistance area.
On Monday, trading in the EUR/GBP currency pair showed two different faces. The UK currency was well bid early in the session and cable even outperformed EUR/USD in the global dollar decline. The better than expected UK production data, at least temporary, reinforced the sterling positive sentiment. However, once again there was no follow through price action on this sterling rebound. Later in the session, the pair even reversed the earlier losses to reach a new recovery high in the 0.8790 area. The most probably was technically inspired (different ST technical picture between EUR/USD and cable). EUR/GBP close the session at 0.8783, compared to 0.8768.
Overnight, the Nationwide consumer confidence came out better than expected at 63 form 61. Sterling was slightly higher against the euro after the release of this figure. Latter today, the UK trade data are on the agenda. A decline in the deficit, in theory, might be slightly sterling supportive. However, ahead of tomorrow’s BoE policy meeting, we expected any market reaction to be guarded.
Global context. Since mid June, the EUR/GBP cross rate entered a consolidation pattern. Sterling had come off from distressed levels at the end of last year. This move was supported by growing evidence that the decline in economic activity in the UK had moderated and by improved global investor sentiment. However, lingering uncertainty on the BoE’s quantitative monetary policy capped the rebound of sterling. The early August BoE decision to raise the asset purchase program to £175B indicated that the Bank intended to maintain a loose policy for a prolonged period of time. Governor King’s preference for an even larger effort suggested that a change towards a tighter policy was still very far away and was good reason to sell sterling. EUR/GBP cleared the top of the MT sideways trading range at the end of August. This break confirmed the deterioration in market sentiment towards the UK currency. The move ran into resistance in the 0.8840 area and some correction kicked in. Nevertheless, the (monetary) picture stays sterling negative. At the end of last week, the pair has come close to a first import support area (0.8700 area). This test was rejected. Short-term players can look to gradually (re)install EUR/GBP long exposure. The 0.8839/66 area (Reaction high/June high) is the next high profile resistance on the charts. The first target of the double bottom formation with neckline at 0.8699 is seen at 0.8940.
