On Wednesday, EUR/USD had a choppy trading session but at the end the changes were very limited. EUR/USD was well bid early in the session. Surprisingly, it was the eco news flow rather than the stock market performance that drove the price action. Better than expected German labour market data and, even more, low demand for liquidity in the ECB 12 month tender drove EUR/USD to intraday highs in the 1.4675 area. The move was reversed soon, but it indicates that the currency market keep an eye on the global monetary context which is the key driver for trading. A slightly disappointing ADP labour market report and an unexpected decline of the Chicago PMI triggered a profit taking move on the equity markets and this caused a moderate correction in EUR/USD too, with the pair temporary dipping below the 1.46 mark. However, once again there was no follow-through price action (both in stocks and in EUR/USD). EUR/USD closed the session at 1.4640, compared to 1.4587 on Tuesday evening.
Today, the eco calendar is well filled. In Europe, the final September PMI and the August unemployment figures are released, but probably not too important for the market. In the US the calendar is more inspiring with the personal income and spending data, the jobless claims, the ISM manufacturing and a few other less important data. Regarding the data, we take a close look at the ISM and at the weekly jobless claims. Recently, many economic data showed tentative signs that the pace of the economic rebound slowed in August/September. If this pattern would be confirmed, the consolidation/moderate correction on the stock markets and on EUR/USD might still go a bit further. However, tomorrow’s payrolls report will be key in this debate. From next week, stock markets will gradually turn their focus to the upcoming earnings’ season.
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 have given some warnings that the Fed might act sooner than usual, but for now those warnings are largely ignored in the FX markets. Nevertheless, the difference in the amount of asset purchases by the Fed (+ 1 trillion) compared to the amount of asset purchased by the ECB (15 mld of covered bond) is a good illustration of the relative unwinding risks associated with the policy in both areas. Any correction on the stock markets might also leave its traces on EUR/USD. However, as we expect these 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 picture for EUR/USD remains indecisive. Recently, we indicated that the 1.4438/50 break-up area would offer a good opportunity to step in again. We’re not there yet, but it is still feasible. As soon as stocks resume their uptrend, the 1.5021 target (2nd target double bottom of 1.3739) might come in the picture.
On Wednesday, the yen strengthened against the dollar early in Asian trading, probably supported by end of quarter hedging activity. Later in the session, USD/JPY settled in a tight sideways trading pattern roughly between 89.40 and 89.85. Trading was mainly technical in nature and the US data had no lasting impact on the price action. USD/JPY closed the session at 89.70, compared to 90.09 on Tuesday. In a broader perspective, recent warnings of the Japanese Finance Minister have eased the pressure on the yen. Nevertheless, the ‘problem’ is far from solved with USD/JPY still struggling to regain the 90.00 mark.
This morning, all eyes were on the Tankan Business confidence report. The headline large manufacturing index rebounded from -48 to -33 (line with the market consensus). Most other sub-indices showed an improved, too. On the other hand, Japanese companies continue to cut capital spending plans. The market reaction to report was rather limed. The Nikkei lost 1.53 %. USD/JPY is marginally higher compared to yesterday’s closing levels. In an interview, Japanese Fin Min Fuji said that he didn’t intend to put the yen’s recent rise on the agenda of this week’s G7 meeting in Istanbul. We don’t make too much out of this but it suggests that the current levels of yen strength are not yet considered exceptionally enough to warrant high profile action (interventions).
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 was a sign of 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 also caused profit taking on yen long positions short-term. We still look to sell USD/JPY in case of a more pronounced up-tick. The 92/93 area might be a good entry point if the correction would go that far. The start of a new quarter often sparks speculation of Japanese investment flows abroad. If so, this might temporary support USD/JPY. The 87.10 (year low) area remains the next high profile target on the downside for this pair.
On Wednesday, EUR/GBP was heavily sold at the start of the European session on market chatter of a big EUR/GBP selling order. EUR/GBP nosedived from the 0.9140 area to reach intraday lows in the 0.9080/85 area. However, later in the session, the storm calmed down. In technical trading, the pair even regained the earlier loses and closed the session at 0.9159, still rather close to the 0.9139 close on Tuesday evening. There were no important UK eco data. In Speech, BoE Miles said the BoE asset purchases are having an impact on the economy. He was also very relaxed on the reversibility of the QE.
Today, the manufacturing PMI will be published. The figure is expected the return just above the 50-mark. The BoE releases its quarterly credit conditions survey.
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, recently we 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. Over the previous days, there was some unwinding of overextended sterling short positions. We still wait/hope for the current correction to go somewhat further (eg. towards the 0.9082/0.9000 area) before adding to EUR/GBP long exposure. (The 0.9082 was tested yesterday).
