On Monday morning, the focus in the currency markets was on the yen cross rates. Through the cross rates these yen moves also dominated the price action in most other major currencies. The steep rise of the yen/sell-off in EUR/JPY early in Asian trading also caused EUR/USD to drop from the 1.4700 area to 1.4565 area before the open of the European markets. However, the Japanese Finance Minster launched a first warning on excessive yen strength. This blocked the decline in EUR/JPY and indirectly also in EUR/USD. At the start of the European session, German stocks tried to profit from the German election result. Initially, the move was not really forceful but during the session stocks gradually moved into positive territory and this helped EUR/USD to regain part of the Asian losses. At the close of the European markets Trichet, gave a declaration before a committee of the European parliament. We didn’t see much new info. On the currency markets, the ECB president said that in the present situation it is important to have a strong dollar and that the solidity of the dollar was very important. It is the usual ECB mantra to take notice of the fact that US authorities see a strong dollar as being in the interest of the US. Nevertheless EUR/USD lost some ground after these headlines hit the screens. Ongoing equity strength at that time was not able to support the single currency. The pair closed the session at 1.4622, compared to 1.4689 on Friday evening. Given the strong gains of the stock markets this EUR/USD performance should be considered as a bit disappointing.
Today, the eco calendar is better filled. In Europe, the sentiment indicators from the European commission will be published. In the US, investors will look out for the consumer confidence and the S&P house price index. We especially keep an eye on the US data. Very recently, some eco data came out slightly disappointing. Until now this didn’t change the overall picture on the recovery. Nevertheless, the development needs to be monitored. As usual, any reaction on the currency market most probably will go via to stock markets. With respect to the latter, it will be interesting to see whether there will be any follow through price action on yesterday’s forceful rebound. If so, the dollar carry trade story might soon resurface.
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 give some warnings that the Fed might act sooner than usual, but for now those warnings are largely ignored in the FX markets. 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 1.4438/48, 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 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 offer a good opportunity to step in again. We’re not there yet, but it is within reach. As soon as stocks resume their uptrend, the 1.5021 target (2nd target double bottom of 1.3739) might come in the picture.
On Monday, the ‘verbal intervention’ from Japan’s Fin Minster Fuji were the tipping point for yen trading as he said that its was wrong to see his previous comments as a license to push the yen higher. USD/JPY (and most other cur/yen cross rates) were aggressively sold early in Asian trading, with USD/JPY setting an intraday/ reaction low in the 88.25 area. However this first official warning blocked the ascent of the yen. USD/JPY rebounded tot the mid 89.50 area and settled in that area for the remainder of the session. The pair closed the session at 89.63, almost unchanged from the 0.8964 close on Friday evening.
This morning, Japan’s Finance minister Fuji brought some additional fine-tuning on his currency view. He repeated that it was wrong to continuously take policies aimed at lowering the value of the currency. However, if moves were irregular, there is still a possibility to take whatever action deemed necessary for the sake of the country. Yen interventions probably are not around the corner yet, but the Japanese authorities obviously want to reinstall some two-way price action in yen trading after the unidirectional moves of late. The Japanese data this morning showed a deepening of the deflationary pressures. This is not really supporting the case for a stronger yen.
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). The long-term trend obviously remains USD/JPY negative. However, recently, we turned more cautious on USD/JPY shorts on technical considerations (the 91.73/90.00 area was a high profile support level). On top of that, the change in talk from the Japanese authorities at least might cause some caution: profit taking on yen long positions short-term. We still look to sell in case of a more pronounced up-tick. The 87.10 (year low) area remains the next high profile target on the downside for this pair.
On Monday, technical factors dominated the price action in the GBP-cross rates. A steep sell-off in GBP/JPY early in Asian trading triggered heavy sterling losses across the board. EUR/GBP spiked to a new reaction in the 0.9300 area. However, as investors had to backtrack on yen long positions after the declarations of Japan’s Fin Min, the steep declines in currencies like sterling had to be reversed, too. So, EUR/GBP already returned to the low 0.92 area at the start of trading in Europe. There was still quite some intraday nervousness, but after all the changes in EUR/GBP were not that big anymore. During the day, there was a lot of market talk on informal meetings between the BOE and the Swedish Riksbank. This fuelled speculation that the BOE is still mulling to reduce the remuneration on commercial banks’ reserves with the BoE. Nevertheless, the debate this time had no lasting impact on sterling trading. EUR/GBP closed the session at 0.9206, compared to 0.9210 on Friday evening.
Today, the UK calendar contains the Final Q2 GDP figures and the Q2 current account data. We think these data are a bit outdated to have a lasting impact on currency trading. The UK lending data and the CBI distributive trades have more potential to move the currency markets.
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 investors’ 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 technical level had been reached (0.9082). There is still no good reason to row against this sterling negative tide. 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). We hold on to this approach.
