On Friday, global markets didn’t really know which way to go and this indecisiveness was visible in major cross rates like EUR/USD. Traders kept a close eye on the G20 meeting but the draft texts and the comments from participants were not really able to guide the price action. The calls for a more balanced economic growth intrinsically are dollar negative in a longer term perspective, but the immediate impact was limited. So, intraday the focus soon turned to the US eco data and to the price action on the stock markets. But those two factors were not able to give a clear guidance either. The US data were mixed to slightly weaker than expected. A weaker than expected US durable orders release caused some intraday EUR/USD weakness, but there was no follow through price action. EUR/USD settled in a sideways trading pattern and closed the session at 1.4689, little changed from the 1.4666 close on Thursday evening. Hawkish comments from Fed’s Warsh were completely ignored in the currency market.
At the first day of the new trading week, the calendar is again very thin. In the US, only the Chicago Fed activity index is on the agenda. In Europe, markets will keep an eye on the German inflation data. However inflation data are not a big issue for the (currency) markets. The testimony of ECB president Tichet before the European parliament deserves some attention, too. We don’t expect Mr. Trichet to bring any breaking news, but he often reserves some kind of ‘primeur’ for the parliament. At the start of trading, the news wires will also comment on the (economic) impact of Angela Merkel’s victory in the German elections. In theory, this might be slightly euro supportive, but we don’t expect too much of it. So, all this brings us again to the ‘usual suspects’ to guide the price action in EUR/USD: stocks and global investor sentiment. In this respect, Asian stock markets are again mostly in the red this morning. This partly explains this morning’s drop in EUR/USD. On top of that, a steep selloff in EUR/JPY was also a factor of importance. Through the cross rates, this sell-off caused EUR/USD to lose more than one big figure early in Asian trade this morning. EUR/JPY has dropped below a key support level (131.04 area). More downward pressure in this cross rate might be a ST negative factor for EUR/USD too.
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. Last week’s Fed decision indicates that this point hasn’t been reached. From time to time, some individual Fed members already gave some warnings that the Fed might act sooner than usual, but for now those warnings are largely ignored. Any correction on the stock markets might also leave its traces on EUR/USD in particular. 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. Recently, the pair extensively tested the key 1.4719 December high and even set a new minor high. However, there was no sharp follow-through action on this ‘break’. Longer term, we maintain a buy-on-dips approach. However, the ST momentum is not really strong. Last week, we indicated that the 1.4450 would be offer a good opportunity to step in again. We’re going in the right direction, but we’re not there yet. As soon as stocks resume their uptrend, the 1.5021 target (2nd target double bottom of 1.3739) might soon come in the picture.
On Friday, the slide of the dollar against the yen continued. Contrary to what was often the case recently, this USD/JPY move was not really in step with the other major USD cross rates. Technical traders were attracted by the key 90.00 area. On top of that, investors were also keen to test the resilience of the new Japanese administration on the ‘strong yen’ politics. The Japanese Finance Minister recently indicated that he was against a policy of deliberately weakening the yen. USD/JPY dropped below the key 90.00 level and closed the session at 89.64, compared to 91.27 on Thursday.
This morning, there was more follow through yen buying with USD/JPY reaching a new short term low in the 88.25 area. This sharp move caused the new Japanese government to make a step backward. Finance Minister Fuji said that currency moves were becoming one-sided in favour of the yen and warned that he had never approved a strong yen. Japanese authorities are (again) monitoring the moves on the currency market! This change in tone already helped USD/JPY to regain almost one yen from the sell-off lows. The strength of the yen is also weighing on Japanese stock market, with the Nikkei losing 2.5%.
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). Recently, we turned more cautious on USD/JPY shorts on technical considerations (the 91.73/90.00 area was a high profile support level). The long-term trend obviously remains USD/JPY negative. However, in a day-to day perspective, we have the impression that the easiest part of the yen gains might be over. The 87.10 (year low) area remains the next high profile target on the downside for this pair. A test of this are over next few days remains very well possible, but we expect the new Japanese authorities to raise their voice again if the pair were to move swiftly toward that key support level. We still look to sell in case of a more pronounced up-tick.
On Friday, the slide of sterling against the euro continued. After a steep sell-off in Asia, the decline of the UK currency continued, albeit at a slower pace. There was no info, but the recent indications that the BOE is quite happy with the positive effects of the weak UK currency on the UK economy continue to drive trading. EUR/GBP closed the session at 0.9210, compared to 0.91230 on Thursday evening.
This morning, UK Hometrack house prices (0.2%/-5.6%) confirmed earlier evidence of a bottoming out process on the UK housing market. However, at least for now, this news was not enough to save sterling. On the contrary, further unwinding of GBP/JPY long positions continued to hammer sterling across the board. EUR/GBP even temporary spiked to the 0.9300 area this morning. There are no important data on the agenda in the UK.
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 and more BOE talk on the positive effects of sterling weakness for the UK economy reinforced investor’s feeling that the BOE was quite happy with the course of events. We have a long-standing sterling negative view and don’t feel any need to change it. However, last week advocated some caution on the recent steep EUR/GBP rise as a key the key technical level had been reached (0.9082). There is still no good reason to row against this sterling negative tide. However, in a day-today 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).
