On Wednesday, EUR/USD extended the gradual upmove that has been in place since the technical break above the 1.4445 area, early last week. The move was again not very spectacular, but the pair finally came to test the key 1.4720 resistance area. Initially, the dollar held up rather well early in US trading. This might have been due to market rumours that some Fed members were contemplating an early rate hike. The rumours drove (ST) US yields a few basis points higher and such a sce-nario would derail the USD carry trade story. As usual, the eco data only played a limited (direct) role for EUR/USD trading. The dollar lost a few ticks after the publica-tion of weaker than expected US current account data. This appointing TIC capital flow data were also no help for the dollar. However, once again, the steep gains on global equity markets were the trigger that pushed EUR/USD to test the December 2008 highs. The carry trade story continued to do its job as the dollar obviously has become the favoured founding currency. EUR/USD closed the session near the in-traday highs at 1.4709, compared to 1.4658 on Tuesday evening.
Today, the US eco calendar contains the housing starts and building permits, the jobless claims and the Philadelpia Fed business outlook survey. Recently, economic activity data (also data from the housing market) indicated that the bottom was probably behind us. We don’t expect today’s data to challenge this view. We espe-cially look out for the jobless claims. An unexpected improvement might fuel eco-nomic optimism. For the time being, positive eco data continue to reinforce carry-trade like behaviour. At some point, the focus might shift to the risk for early Fed ac-tion. This would make the picture more dollar supportive. However, at this stage we still expect the existing trading pattern to remain: good news is good for riskier assets and this is also a favourable context for EUR/USD.
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 carry-trade 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 po- sition. 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 is now extensively testing the key1.4719 December high, which if broken, would paint a huge double bottom for-mation on the charts with targets more than 20 big figures higher. A swift break might raise voices warning for an outright dollar crisis. In a day-to-day perspective, we don’t have the impression that we are at the eve of a EUR/USD landslide. Never-theless, the LT picture stays EUR/USD constructive and would even improve further in a case of a sustained break above this high profile level.
On Wednesday, the USD/JPY pair showed some intra swings, but at the end of the day, the changes were very limited. USD/JPY nosedived as the decision to appoint Mr Hatoyama as new Prime Minister, hit the screens. The Democratic Party is seen as being less inclined to intervene in the currency market to stop a (gradual) rise of the yen. The pair dropped to the recent lows in the low 0.90 area, but a real break of this key technical/psychological level didn’t occur. This is a bit ‘strange’ as the new PM indicated that he considered the recent yen move as gradual. This could be seen as confirmation that the new government isn’t preparing to intervene in the cur-rency market anytime soon. Later in the session, USD/JPY even recouped most of the earlier losses. Market rumours/speculation on the Fed contemplating to act ear-lier than expected were a good reason to cash in some gains on USD/JPY shorts. USD/JPY closed the session at 90.93, compared to 91.05 on Tuesday.
This morning, the BOJ upgraded its assessment of the Japanese economy. This fu-els speculation that the BOJ might not prolong some of its measures to support cor-porate funding. The yen hardly reacted to the BOJ headlines. Asian stocks are again showing decent gains this morning, but this fails also to inspire the price action in the USD/JPY currency pair.
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 be-tween USD/JPY and global investor risk aversion/risk appetite even became some-what 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) con-tinued 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 Wednesday, UK markets had to digest the sharp swings after the BoE King’s tes-timony before a committee of the UK parliament on Tuesday. The BoE governor in-dicating that the bank was still mulling a reduction of the interest rate paid on excess bank reserves hammed ST UK yields. Sterling was hammered too. Short-term yields stayed near the lows yesterday morning and this continued to weigh on ster-ling. EUR/GBP reached a new correction high in the 0.8930 area. Later in the ses-sion, a profit taking move at the short end of the UK yield curve (yields reversed part of Tuesday’s decline) temporary supported sterling. However, the gains could not be sustained and a broader euro rebound caused EUR/GBP to revisit the intra-day highs. EUR/GBP closed the session at 0.8924, compared to 0.8891 on Tuesday. The UK labour market data were close to expectations and had no lasing impact on ster-ling trading.
Today, markets watch out for the UK retail sales and the CBI industrial trends. Dif-ferent measures of the UK retail sector recently often gave some mixed signals. Nevertheless, it would be interesting to see the reaction on the currency market in case of better than expected UK eco data.
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 mone-tary 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 pe-riod 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 deteriora-tion 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 evi-denced by BoE King’s remarks in his testimony earlier this week. We maintain a buy-on-dips approach. The 0.8700 area remains the key support level, but following the break higher earlier this week, a decline below 0.8829 would be a disappoint-ment for the euro bulls. The first target of the double bottom formation with neckline at 0.8699 stands at 0.8940, a level is under test. It may be the sign for some con-solidation. In a longer term perspective, resistance at 9037/82 (April/May highs) are now key
