On Thursday, markets tried to find out how far the post-Fed correction would go. European stock markets nosedived immediately after the start of trading. However, the Fed-statement didn’t contain any signal that the monetary environment would change anytime soon. So, stocks tried to regain the early losses and EUR/USD moved higher in step. Better (lower) than expected US jobless claims even briefly raised the hope that equity markets could simply extend their rally. EUR/USD tested the 1.4800 area after the publication of the claims. Later in the session, a disappointing US homes sales release spoiled the (carry trade) game. Equities turned south again and EUR/USD fell more than a full big figure. EUR/USD closed the session at 1.4666 compared to 1.4735 on Wednesday evening. One might be a bit surprised to see such a big move triggered by the existing homes sales release. This suggests that both equities and EUR/USD were overextended and ready for a corrective, technical, profit-taking move. Yesterday several central banks (among them the ECB, the BOE and the SNB) announced that they will scale down operations to provide dollar liquidity, which might have been (slightly) USD supportive.
Today, the European calendar contains only the M3 money supply data. Money supply and credit growth are important items for the ECB, but they seldom move the currency market. In the US, the durable orders, the new home sales and the Final Michigan consumer confidence are on the agenda. Over the previous days, US eco data had quite some impact on the intraday price action of the stock markets and of EUR/USD. This might also be the case today. In case of weaker data, the correction on the stock markets and on EUR/USD might have some further to go. Aside from the data, the headlines of the G20 will continue to dominate the newswires. However, we don’t expect a strong signal for the currency market. Overnight there were comments from Chinese policymakers that a stable dollar was important for the global economic recovery. However, this is probably partly tactics to fend off critics on China’s currency policy.
Global context. Recently, the swings in risk appetite/risk aversion were the 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 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. This week’s Fed decision indicates that this point hasn’t been reached. Any correction on the stock markets might also leave its traces on the currency market and on EUR/USD in particular. Nevertheless, as we expect any corrections on the liquid- ity 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 key 1.4719 December high and even set a new minor high. However, until now there was still no sharp follow-through action on this ‘break’. We maintain a buyon- dips approach. The 1.4611 reaction low is the first important ST support. The 1.4450 area is the key area to watch. A correction towards this area would offer a good opportunity to step in again. However, we doubt whether the dollar will have enough rebound potential to return to this level. As soon as stocks resume their uptrend, the 1.5021 target (2nd target double bottom of 1.3739) will soon come in the picture.
On Thursday, trading in the USD/JPY currency pair had a roller-coaster ride. On the Asian and European stock markets there was at first only limited follow through price action on the post Fed correction in the US on Wednesday evening. This caused the dollar to give back part of its gains. However, a new selling wave on the stock markets after the US existing new homes sales reversed the early move and USD/JPY closed the session little changed at 91.27, compared to 91.29 on Wednesday evening.
This morning, the performance of the Asian stock markets (and of the Japanese markets in particular) is not really inspiring with limited to decent losses (Japan) for most major indices. However, this time the stock markets weakness failed to support USD/JPY. The pair was drifting south toward the mid 90 area this morning. Heavy selling from GBP/JPY, through the cross rates, might be part of the explanation for this move.
Global context. USD/JPY reached a 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 reversed. 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. The 87.10 (year low) area remains the next high profile target on the downside for this pair. We wouldn’t be surprised for this level to be reached in case of a break below the 0.90 psychological barrier.
On Wednesday, sterling performed something that looked like a technical rebound. At that time, the minutes of the previous BoE meeting revealed that BoE governor King had joined the majority of the board to maintain the amount of asset purchases at £ 175 bln. As such, this tactical positioning was not really big news, but is was a good reason enough for short-term players to scale back sterling long positions. Yesterday morning, we indicated that the global (negative) picture for sterling hadn’t changed. Obviously, BoE governor King doesn’t feel the need to support its battered currency. Indeed in an interview, Mr. King said that a weak domestic currency was helping to rebalance the nation’s economy. Those remarks came only a few days after a BoE article said that sterling’s long-run exchange rate may have fallen. The message for the currency market was clear: The BOE is (very) happy with the current decline of sterling, especially as it is having little negative impact on the UK bond market. Another wave of sterling selling started and ERU/GBP in two waves jumped from the 0.9000 area to test offer in the 0.9150 area at the end of European trading. The pair closed the session at 0.9130, compared to 0.9015 on Wednesday. Overnight, sterling sell-off continued on the Asian markets.
Today, the only the final Q2 Business investment is on the agenda.
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 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. 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). Early this week we advocated some caution on the recent steep EUR/GBP rise as the key 0.9082 level had been reached. Some temporary consolidation kicked on, but yesterday’s break higher only reinforced the sterling negative sentiment. There is still no good reason to row against this sterling negative tide. We stay sterling negative longer term. However, in a day-to-day perspective we wouldn’t jump in at the current level anymore and wait/hope for a (limited) correction (eg. toward the 0.9082/0.9000 area).
