On Thursday, currency traders were keen to see reaction on the forex markets as the EUR/USD currency pair reached the high profile barrier of 1.4719 (December 2008 high) on the charts. The positive global investor sentiment in Asia and early in European trade continued to support carry-trade like behaviour. EUR/USD set a new high in the 1.4765 area. However, stocks failed to build out their gains and this capped also the upside in EUR/USD. The pair returned to the low 1.47 area early in US trading. The US housing starts/permits and the claims were too close to expectations to trigger a forceful market reaction. The same was true for the performance of the US stock markets at the start of the US trading session as it failed to give currency trading a clear guidance. The headline index of the Philly Fed indicator came out better but the details were not really convincing, preventing an outspoken market reaction. EUR/USD held close to the recent highs, but a clear break higher didn’t occur. So, EUR/USD closed the session at 1.4741, compared to 1.4709 on Wednesday evening.
Today, the calendar of eco data (both in the US and in Europe) hardly contains any data that one would expect to have a lasting impact on currency trading. So, the key question remains whether the carry trade story should continue. In a day-to-day perspective, the US stock market indices (S&P) are showing a doji-like signal. If this signal would lead to a short-term (end of week?) profit taking move on the stock markets, this might also slow the rally in EUR/USD. To be honest, US indices gave already a similar signal last Friday, but it was easily rejected.
Global context. Since early June, the EUR/USD currency pair had been locked in a sideways trading pattern. Recently, there were 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 environment, the dollar has become the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs together with the Fed’s intention to run an expansionary monetary policy for a prolonged period of time offer additional ammunition for carry traders to use the dollar rather than other currencies. This has 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 is now extensively testing the 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 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. Nevertheless, 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 Thursday, the USD/JPY showed some intraday swings, but at the end of the day the chances were very limited. Overall dollar weakness caused the pair to drop to the mid 90 area early in European trading. However, a renewed test of the week lows didn’t occur. An attempted to try to make some headway to the upside failed also. The carry trade story apparently doesn’t offer any guidance for USD/JPY trading anymore. This leaves USD/JPY at the mercy of technical considerations. The more cautious tone of the new Japanese government on the strength of the yen, at this stage has no big impact on yen trading. The pair closed the session at 91.08 compared to 90.93 on Wednesday.
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 Thursday, trading in EUR/GBP was at first locked in a very narrow trading range in the low 0.8900 area. There was a cautious sterling bid at the start of the session. The UK retails sales came out on the weaker side of expectations and this sparked a brief uptick in EUR/GBP. EUR/GBP revisited the 0.89 area at the start of US trading, but again no break occurred. Ongoing investor caution on the BoE strategy going forward apparently is still block any chances of a more distinct rebound of sterling against the euro. Even more, sterling came again under pressure after the close of the European markets. Market talk/press headlines that UK Lloyds Bank would need more capital and that it would not be able to withdraw from the government’s toxic asset scheme anytime soon weighed on the UK currency. On top of that, the steep de decline in ST UK interest rates makes the UK currency an ever more interesting target to fund carry trades, too. So, after all, EUR/GBP closed the session again higher at 0.8961 compared to 0.8924 on Wednesday.
Today, monthly UK budget data and the M4 money supply figures are scheduled for release. Usually these data series have a limited impact on the currency markets. However, we still keep an eye on the budget data as more negative surprise might reinforce the sterling negative sentiment.
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 triggered a new sterling selling wave. The break above the 0.8700 range top confirmed the deterioration in market sentiment towards the UK currency. At the September meeting, the BoE took no additional policy steps. Nevertheless, the (monetary) picture stays sterling negative, as evidenced by BoE King’s remarks in his testimony earlier this week. We maintain a buy-on-dips approach. The first target of the double bottom formation with neckline at 0.8699 has been met (0.8940), the second target (0.8998) is coming very close. Overbought conditions might (temporary) slow the ascent of the euro against sterling. Nevertheless, we don’t feel any need to row against the sterling negative tide. The 0.9037/82 (April/May highs) are the next high profile targets on the technical charts.
