On Monday, global markets looked ready for a correction on the standing trends of recent weeks. Stock markets took a hesitant start to the new trading week and this sign of lower investor risk appetite also filtered through into the currency market. Some investor caution ahead of the FOMC meeting might have played a role in locking in some profits on riskier assets/carry trades. EUR/USD drifted lower from the 1.4700 area touched early in Asian trading. A scaling down of dollar shorts pushed EUR/USD to intra-day lows in the 1.4610/15 area early in US trading. There were also some headlines that Iran had replaced the dollar with the euro for calculating the value of its Oil Stabilization Fund, but it wasn’t an important factor for USD trading, we think. US stocks opened in the red, too. However, the correction was fairly limited and this was enough for EUR/USD to reverse the early losses. So, the least one can say is that global recovery trade looks resilient, preventing a major correction on the currency markets. EUR/USD closed the session at 1.4680, compared to 1.4712 at the end of last week.
Today, the calendar of eco data is again very light and uneventful. Later in the session, markets will take a close look at the 2-year Note auction in the US. One day before the Fed meeting the auction might cause some additional market nervousness. However, recently the auctions of US Treasuries were not really a big item for the currency market. Global markets probably will keep a wait-and-see mode ahead of the tomorrows Fed decision. One might also expected a lot of market talk on the G20 meeting that will be held later this week. Some sources are suggesting that currencies (and in particular dollar weakness) might also be discussed (formally or informally) at the G20. As the slide of the dollar is still developing in a gradual manner, we don’t expect official remarks on the currency market. Even more, policymakers stressing the need for a global rebalancing is of course no call to reverse the slide of the US currency.
Global context. During the summer, the EUR/USD currency pair had been locked in a sideways trading pattern, as there were signs that the worst of the global crisis was 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 didn’t really offer a clear guidance for EUR/USD trading and this will probably remain the case for some time. Swings in risk appetite/ risk aversion were the most obvious alternative driver on the currency markets. In this context, the 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 start tightening monetary policy. We don’t expect this to happen anytime soon, but keep any eye on this week’s Fed meeting. Short-term, there might be room for consolidation on the equity rally, which might also (temporary) cap the upside in EUR/USD. However, as no forceful correction on the liquiditydriven equity rally is likely, the eventual correction in EUR/USD might be limited, too.
Looking at the (technical) charts, EUR/USD cleared the range top at 1.4448, improving the picture for EUR/USD. The pair extensively tested the key1.4719 December high, but no clear break occurred, yet. If broken in a sustainable way, the figure would paint a huge double bottom formation on the charts with targets more than 20 big figures higher. 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. The 1.4450 area is the first support to watch out for.
On Monday, trading in USD/JPY more or less tracked the swings in the other major dollar cross rates. However, with the Japanese markets closed, trading developed in thin market conditions. In Asian and early in European trading, USD/JPY joined the overall dollar rebound and set an intraday high in the 92.50 area at the start of US trading. However, in step with other USD cross rates, USD/JPY had to return part of its gains and closed the session at 91.93, compared to 91.29 on Friday.
Today, Japanese markets are still closed. So, yen trading still develops in thin market conditions. Asian equity markets are showing a mixed, indecisive trading pattern this morning. USD/JPY has lost a few ticks compared to close yesterday evening.
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 suggested underlying dollar weakness. The link between USD/JPY and global investor risk aversion/risk appetite became less tight. Even more, the dollar (and not the yen) gradually has become the preferred funding currency for carry trades. So, the action in USD/JPY more or less joined the global dollar trend (decline). Last week, we turned more cautious on USD/JPY shorts on technical considerations (the 91.73/90.00 area 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 93.30 is a first high profile resistance short-term. In a longer term perspective, the 87.10 area remains the next high profile target for this pair.
On Monday, sterling held close to the recent lows against the euro. At the start of trading, the focus in the currency market was on the BoE article indicating that the sustainable real sterling exchange rate of sterling may have fallen due to the financial and economic crisis. This was another hit for the UK currency. EUR/GBP reached a new reaction high in the 0.9075 area at the start of trading in Europe. So, the pair came close to the key 0.9082 resistance (April 24 high). However, with markets already extremely positioned toward sterling shorts after the avalanche of sterling negative news last week, a real test of this key level didn’t occur. EUR/GBP settled in a sideways trading pattern in the mid 0.90 area for the remainder of the session. The pair closed the session at 0.9055, little changed from the 0.9040 close on Friday evening.
Today, the UK eco calendar is again empty.
Global context. In 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 before Parliament last week (discussion on interest rates for (excess) bank reserves). Recently, we had a buy-on-dips approach for EUR/GBP. After the recent rebound, the pair is now heavily overbought. The targets of the double bottom formation with neckline at 0.8699 have been met (0.8940/0.8998) and the pair is now coming close to the 0.9082 (April high). There is still no good reason to row against this sterling negative tide. We stay sterling negative longer term. Nevertheless, we wouldn’t jump in at the current levels anymore. ST players can even consider partial profit taking on EUR/GBP longs and look to re-buy in case of a correction. We have the impression that the market has come to the conclusion that the only way for sterling is to go down. This kind of extreme market positioning always contains the risk of a correction.
