On Tuesday, both the stock markets and the currency markets, after a one day break, resumed the established trend moves. Global markets again fully played the card of the global recovery. Stocks and other riskier assets were picked up and, in a Pavlov-like reaction, the dollar was sold for setting up new carry trades. The upcoming Fed policy decision and the G20 later this week were no reason for investors to become more cautious. So, the dollar came again under pressure against most major currencies. Regarding the euro-side of the story, ECB’s Weber in an interview said that the behaviour of the currency markets was not out of line with the economic developments over the recent months. So, at least Mr. Weber doesn’t see the strength of the euro as an important problem yet. This is remarkable as the tradeweighed euro is coming close to the historic highs. EUR/USD cleared the 1.4712/67 resistance area early in European trading and settled in the low 1.48 area for the remainder of the session. EUR/USD closed the session at 1.4790, compared to 1.4680 on Monday.
Overnight, the Q2 growth figures for New-Zealand came out in positive territory (and above market consensus). From a global point of view, New-Zealand data are not that important, but the end of the New-Zealand recession continues to support the carry trade story.
Today, the calendar contains the preliminary release of the EMU PMI’s and various national business confidence surveys. The market consensus expects those data to confirm the rebound in economic activity. Most PMI’s are expected the regain the boom-or-bust level of 50. If so, these data would also support the established trends/recovery trades on the stock and currency markets. However, usually the immediate impact of these on the currency market is rather moderate. Later in the session focus will turn to the Fed meeting and currency traders will also keep a close eye on the statements that will be given in the run-up to the G20 meeting. The Fed is still expected to maintain its accommodative money policy. Any hints that Bernanke an Co are preparing the exit of the current accommodative policy poses a threat to a market that has build up huge dollar short exposure. However we don’t expect such a sign today. Regarding the G20, the proposals on a rebalancing of the global economy might imply that the currencies of deficit countries will be allowed to stay weak (or even to decline further). So, this discussion also doesn’t challenge the current USD-negative trend.
Global context. Recently, the swings in risk appetite/risk aversion were the most obvious drivers on the currency markets. In this context, the decline of the dollar is 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 carrytrade 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 at today’s FOMC meeting. Any correction on the stock markets might also leave its traces on the currency market. Nevertheless, as we expect any corrections on the liquidity driven rally on the stock markets to be limited, we also see the downside in EUR/USD well protected.
Looking at the (technical) charts, EUR/USD cleared the range top at 1.4448, improving the picture for EUR/USD. Over the previous sessions, the pair extensively tested the key1.4719 December high and yesterday’s break higher only reinforces the EUR/USD positive configuration. If confirmed, yesterday’s break would paint a huge double bottom formation on the charts with targets more than 20 big figures higher. For now, the dollar negative trend looks well in place 1.5021 is the last target of the double bottom formation off from 1.4450.
On Tuesday, trading in USD/JPY again mostly tracked the price action in other USD cross rates. So, the rebound on the stock markets currently even tends to support the yen against the dollar rather than the opposite which was the case a few months ago. USD/JPY closed the session at 91.10, compared to 91.93 on Monday.
Today, Japanese markets are still closed. So, yen trading will still develop in thin market conditions.
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 and has now even completely revered. The dollar (and not the yen) gradually has become the preferred funding currency for carry trades. So, the price 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 Tuesday, EUR/GBP trading showed still some intra-day volatility but sterling gradually entered calmer waters after the recent sell-off. EUR/GBP tested the key 0.9082 resistance area (24 April high) early in the session. However, after the recent forceful move, this high profile level apparently was considered a good opportunity to cash in some profits on the sterling short positions. So, even as new carry traders were set up in the (low-yielding) dollar, sterling managed to regain some ground. EUR/GBP closed the session at 0.9042, compared to 90.55 on Monday.
Today, the UK eco calendar contains the minutes from the previous BOE meeting. Markets will look out whether the BOE discussed additional policy measures (raising the amount of asset purchases, reduce the interest rate on excess bank reserves).
Any indications that the Bank is still considering to take additional step in its QE policy could put renewed pressure on sterling.
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 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. We look to re-buy in case of a correction. In a day-to-day perspective, we have the impression that the market had 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.
