On Monday, global markets looked ready for a correction, as the US-China trade dispute was a good excuse to cash in some gains on the stock market rally which might leave its traces on the currency market, too. Most major stock market indices opened lower and this kept the EUR/USD in the lower half of the 1.45 big figure for most of the European morning session. However, neither for stocks nor for EUR/USD the downside momentum was forceful. Later in the session, EUR/USD rebounded above 1.46 even as the major stock market indices were still in negative territory. This confirms our feeling that the recent rebound in EUR/USD was not only a sign of rising appetite for risk, but also a sign of underlying dollar weakness. To be honest, we would not make too much out of yesterday’s price action in a data light session, but the least one can say is that the euro staged a strong performance yesterday. The pair even reached new reaction highs and closed the session at 1.4618, compared to 1.4571 on Friday.
Today, the eco calendar is interesting. Key question is whether the data will provide additional fuel for the global recovery story. In Europe, the ZEW will be published, while in the US the producer prices, the retail sales and the NY empire state manufacturing index are due for release. The Retail sales headline figure is expected to show a steep rise (1.9% M/M). However, global markets will take a closer look at the figure ex-autos. For now, a strong figure probably won’t be a big help of the dollar. We also keep an eye on a speech from ECB’s Stark as he will address the exit strategy from the non-conventional measures. The stock market reaction to the eco data will most probably also determine the price action on the currency market. However, whatever the outcome, we have the impression that the downside in stocks and in EUR/USD is well protected.
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 the global crisis might be over. However, the Fed and the ECB still indicate 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. On top of that, in this low yield environment, the dollar apparently has become the preferred currency to fund carry-trade like deals. However, the market focus gradually turned also more to dollar weakness. The huge US financing needs together with the Fed’s intention to run an expansionary monetary policy for a prolonged period of time have put the dollar in a vulnerable position. We don’t see many reasons to turn dollar positive before it becomes clear that the Fed will take the lead in tightening monetary policy. We don’t have any indication that this will happen anytime soon. In a day-to-day perspective, there might be room for some consolidation on the recent equity rally. This might also (temporary) cap/slow the rebound in EUR/USD. However, as no forceful correction on the liquidity-driven equity rally is likely, the eventual correction in EUR/USD might be limited, too.
Looking at the (technical) charts, EUR/USD last week cleared the range top at 1.4448, improving the picture for EUR/USD. The 1.4719 December high is the last area of defense. The pair showed tentative signs of topping out short-term (doji-like signal on Friday), but this signal was not confirmed yesterday. The LT picture stays EUR/USD constructive. A buy-on-dips approach remains preferred. A break above the 1.4719 area would pull the trigger for acceleration in the USD-decline.
On Monday, the USD/JPY decline slowed. The pair even recouped (a small) part of its recent losses. We see the move as technical in nature. The pair came close to the psychological barrier of 90 and this was a good excuse for short-term players to cash in some gains on the recent yen-rally. The rebound in EUR/JPY also gave USD/JPY downside protection. Last but not least, Japanese officials warned that they were watching the currency moves closely. USD/JPY closed the session at 90.94, compared to 90.71 on Friday evening.
This morning, there is some market talk on the yen strategy of the new government. The outgoing finance minister repeated the usual mantra that sudden currency swings are undesirable. However, the members from the Democratic Party recently indicated they wanted to support domestic demand and a strong yen is no obstacle to this goal. Markets are keen to hear the comments on the currency from the new government once they are in charge.
Global context. USD/JPY reached a short-term reaction high in the 97.80 area early August. Despite a positive global investor sentiment, the dollar 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 even became somewhat asymmetric. USD/JPY hardly gained on a strong stock market performance while negative corrections (or even a slowdown in the rise of the stock markets) continued to support the yen. Apparently, the dollar (and not the yen) has become the preferred funding currency for carry trades. Over the previous days, we turned more cautious on USD/JPY shorts on technical considerations (the 91.73 level was a high profile support level). Nevertheless, the odds for a sustained USD/JPY rebound are far from bright. So, this remains a sell-on-upticks environment. The year lows in the 0.8710 area remain the next high profile target for this pair.
On Monday, EUR/GBP moved higher throughout the whole trading session and the pair even returned (temporary) above the 0.8800 barrier. In this respect, the pair reversed the sterling rebound that occurred after last week’s BoE policy decision. A report from Moody’s warned that the creditworthiness of the UK banking sector was set to remain under pressure for the next 12-18 months. The report didn’t bring that much of a surprise, but it was no help for the UK currency either. Investor caution ahead of today’s appearance of BoE members before Parliament might have played a role, too. EUR/GBP closed the session at 0.8817, compared to 0.8747 on Friday.
Overnight, the RICS house price balance moved into positive territory for the first time in more than 2 years, indicating that prices rose in the month of August. Sterling regained some ground after the publication of the report. Later today, the UK CPI will be published, but market attention will in the first place go to the testimony of Mr. King (and several other BoE members) before parliament. We would be surprised to see the BoE turning to a more hawkish tone at the current juncture.
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 and Governor King’s call for an even greater effort indicated that the Bank intended to maintain a loose policy for a prolonged period of time. This was a 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 brief sterling rebound at the end of last week. 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.
