On Thursday, the rise in EUR/USD shifted into a lower gear, but the underlying bid in the pair was still in place. EUR/USD opened in the 1.4580 area, but as the rally on the European stock markets stalled, this also (temporary) capped the ascent in EUR/USD. The US data (claims and trade balance) gave a mixed message for the currency market and had no lasting impact on trading. US stocks showed a brief dip after the open and this caused EUR/USD to revisit the 1.45 area. Market rumours/ speculation on potential interventions of the Swiss national Bank at that time, might also have played a role. However, the correction on the global, liquidity driven rally was again very short-lived. Stocks soon recouped the early losses and EUR/USD swiftly overcame its temporary weakness. The pair even set a minor new high in the 1.4610/15 area. The US 30-year auction went again remarkably well. It is a bit strange, but considering the success of this week’s US bond auctions, the weakness of the dollar apparently is not an item for bond investors (yet). EUR/USD closed the session at 1.4582 compared to 1.4557 on Wednesday.
Today, the European eco calendar is very thin. In the US the import price, the wholesale inventories and the Michigan consumer confidence are scheduled for release. Global markets will give most attention to the consumer confidence release. This morning, there is a lot of market chatter on the better than expected Chinese production data prompting investors to move to riskier assets and thus leaving the dollar. To be honest, the ‘surprise’ of those Chinese data was not that big and the reaction on the Asian stock markets is moderate. Nevertheless, this indeed is still enough to push the dollar deeper into the red, with EUR/USD testing the recent highs at the moment of writing.
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. In case of an acceleration of the USD-decline, markets will look to the central bankers (interventions), but we don’t have the impression that coordinated action is around the corner.
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. However, earlier this week EUR/USD cleared the previous range top and this break obviously improved the picture for EUR/USD. The 1.4719 December high is now the last area of defense. On a closing basis, EUR/USD already settled above the December highs. So, the red alert for the dollar is still in place. We continue avoid/protect all USD long exposure. A break above the 1.4719 area could pull the trigger for some kind of dollar panic.
On Thursday, USD/JPY continued to join the broader dollar decline. After a brief uptick in Asia and during the morning session in Europe, USD/JPY dropped again to the key 91.75/60 support area. The level was again tested in an extensive way. However, the dollar was (temporary) saved by the rebound on the US stock markets late in the session. The pair closed at 91.73, compared 92.04 on Wednesday.
This morning, Asian stocks showed a mixed picture. Chinese stock markets are taking the lead. The gains in most other Asian markets are limited. The Japanese indices are even in the red. Fears that the strong yen will hurt Japanese exporters are weighing in the Japanese market. The Final Japanese Q2 GDP figure was revised down to 0.6% Q/Q. However, as the revision was mostly due to a scaling down of the inventory levels, the news shouldn’t be taken than negative. The jury is still out, but the USD/JPY is currently making another forceful attack of the 91.60 support area.
Global context. USD/JPY reached a short-term reaction high in the 97.80 area early August. Despite a positive global investor sentiment, the US currency could not hold on to its gains against the yen. This indicated underlying dollar weakness. The link between USD/JPY and global investor risk aversion/risk appetite 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. One might come to the conclusion that the dollar (and not the yen) is becoming the preferred funding currency for carry trades. As the pair came close to the key 91.73 support, we advocated profittaking on USD/JPY short positions. However, the odds for a USD/JPY rebound are far from bright. 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. The short-term reaction high at 93.30 now is the first technical resistance area. A sustained break below 91.73/61 (which is becoming highly likely) could trigger a new USD selling wave. The red alert for the dollar is still on. The year lows in the 0.8710 area might come in the picture soon.
On Thursday, EUR/GBP hovered sideways close to/just above to the 0.88 mark ahead of the BoE monetary policy decision. The Bank of England as expected left rates unchanged at 0.5% and the amount of asset purchased was also maintained at £175. The market apparently had priced in an outside chance for the Bank to raise the amount of asset purchases (or at least a hint in that direction). As this ‘risk’ was ruled out, sterling shorts were scaled down. EUR/GBP dropped from the 0.88+ area to the 0.8730 area and closed the session at 0.8754, compared to 0.8801 on Wednesday.
Today, the UK PPI data are on the agenda. However, price data currently are not really in focus.
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. 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. At the September meeting, the BoE took no additional policy steps. This triggered a sterling rebound yesterday. Nevertheless, the (monetary) picture stays sterling negative. We maintain a buy-on-dips approach. The 0.8700 area is still the first important short-term support. The 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.
