On Tuesday, EUR/USD was initially locked in a narrow range close to the 1.46 mark, as markets were waiting the US eco data, especially the retail sales. Sales exceeded expectations, the NY Fed manufacturing survey showed the industrial recovery was ongoing and the PPI report suggested that deflation is no item. Stock market futures initially perked up, but lacked clearly momentum and once the cash trading started, equities reversed course, erasing the initial gains. Currency traders initially bought the dollar pushing EUR/USD from about 1.4620 to a daily low of 1.4561, but there was no conviction behind the move and soon the dollar was again sold. Fed chairman Bernanke said the economy had probably left recession, but also that the recovery would be slow, risks still abound and little job creation should be expected in the near term. So, markets concluded that monetary policy would remain accommodative for a long time. So the carry trade where the dollar is often used as funding currency seemed safe. Equities found their composure back and moved again higher. The dollar selling accelerated and EUR/USD hit a new cycle high at 1.4686 before settling at 1.4658 in the close, up from 1.4619 on Monday. As the dollar lost across the board, the trade weighted dollar was down too, reaching its lowest level in about one year.
Today, the eco calendar contains the final August HICP (inflation), which shouldn’t affect trading, while in the US the CPI, the industrial production, the current account and the TIC data are scheduled for release. So, the US calendar is quite long, but we would be surprised to see any of these data having a lasting impact on EUR/USD trading. Recently, the market hardly reacted to the TIC data, but with the dollar fighting an uphill battle, a poor outcome of the TIC data might cause some intraday nervousness. The decline in the current account deficit is intrinsically a positive for the dollar, but the report is outdated (trade balance is timelier) and shouldn’t contain much new info. The general (bearish) dollar sentiment and technical considerations might drive the currency market today.
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 guidance 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 driver 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 en- vironment, the dollar apparently has become the preferred currency to fund carrytrade deals. So, the market focus gradually turned 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. There is no indication yet of a Fed change in policy. In a day-to-day perspective, there might be room for some consolidation on the equity rally, which 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 pair now stands before the very key1.4719 December high, which if broken, would paint a huge double bottom formation on the charts with targets more than 20 big figures higher. A break might raise voices warning for an outright dollar crisis. The pair showed tentative signs of topping out short-term recently (doji-like signal on Friday), but this signal was not confirmed, even if the uptrend lost clearly some momentum. Given the importance of the resistance and also the overbought character, we would think that a first test of the resistance will fail. The LT picture stays EUR/USD constructive. A buy-on-dips approach remains preferred. A neat break above the 1.4719 area would pull the trigger for acceleration in the USD-decline.
On Tuesday, the USD/JPY at first continued its correction higher that started on Monday after the market didn’t succeed in pushing the pair below the 90 level. However, there was little momentum behind the move. The stronger US eco data initially accelerated the move higher with the pair setting a high at 91.64. However the dollar buying abruptly stopped, the sellers took aver sending the pair back to the lows of the session at 90.79, before bottom fishers appeared late in the session. USD/JPY closed at 91.05, virtually unchanged from Monday’s close at 90.94.
This morning, the pair traded volatile in the 90.75 to 91.15 range. There were no data releases and the market will only get feedback on the BOJ meeting tomorrow. Japanese equities started the session in a positive mood, but have given back a large part of the initial gains in the last few hours. A few minutes ago the parliament appointed Mr. Hatoyama as new Prime Minister, which was apparently the sign for some yen buying. That may be due to expectations that the new government is less concerned by the strength of the yen than the outgoing one.
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 Tuesday, the only big move in the major currency cross rates occurred in the sterling market. The UK currency initially gained some ground on better RICS housing data and a slightly higher than expected August CPI. However, the tide turned during the testimony of BoE’s King (and other BoE members) before a committee of the UK parliament. Mr. King was cautions/soft on the economic recovery and indicated that the Bank was mulling a reduction of the interest paid on reserves held by commercial banks at the BoE. This was not a completely new idea, but it reinforced the market feeling that the Bank of England is still contemplating actions to expand its QE rather than preparing an exit strategy anytime soon. Sterling sold off and EUR/GBP jumped to the mid 88 level. While the momentum of the move calmed down, sterling continued to lose ground closing the session at 0.8891, up from 0.8817 on Monday. From a technical point of view the important resistances at 0.8839/66 have been taken out.
Overnight, more sterling selling occurred on the back of the technical break higher of the pair that currently changes hands at 0.8913. Today, the EMU only contains the final HICP report, which should not move the market and the UK labour market report for August. While these most often turn out better than expectations, its impact on sterling is low. So, technical considerations and re-positioning might drive sterling. While the outlook is for more Sterling losses, some consolidation might kick in following a three-day strong up-move of EUR/GBP.
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, as evidenced by BoE King’s remarks at yesterday’s testimony. We maintain a buy-on-dips approach. The 0.8700 area remains the key support level, but following the break higher yesterday, a decline below 0.8829 would be a disappointment for the euro bulls. The first target of the double bottom formation with neckline at 0.8699 stands at 0.8940, a level approached overnight. It may be the sign for some consolidation. In a longer term perspective, resistance at 9037/82 (April/May highs) are now key.
