On Thursday, EUR/USD drifted lower throughout most of the session. As usual the decline in EUR/USD more or less coincided with the forceful technical correction on the stock markets. However, considering the steep losses of equities, the correction of EUR/USD was after all fairly limited. There was not really a clear explanation for this EUR/USD resilience. Is it an indication that market talk on the US dollar as funding currency for carry trades had been a bit overdone? There was also some market talk on the upcoming G7 and how it would address the issue of the currency markets. Eurozone officials were said to have prepared a joined position on the currency issue that will be put on the table at this weekend’s G7 meeting. Obviously there is quite some unease in Europe on the recent strengthening of the single currency. Mr. Trichet in a covert way warned that excessive volatility and disorderly movement in exchange rates had adverse implications for economic and financial stability. In the same context, US Treasury Secretary Geithner, who will also join the G7 meeting in Istanbul, reiterated the usual US mantra that a strong dollar is very important for the US. So, at first sight everyone agrees on a stronger dollar, but it is obvious that no one is able (Europe) or prepared (the US) to take any action to support their rhetoric. On top of that, after last week’s G20, there is growing uncertainty whether the G7 is still the right forum to address currency matters. In this context, one should not be surprised this pre-G7 talk having little impact on currency trading. EUR/USD closed the session at 1.4545, compared to 1.4640 on Wednesday evening.
Today, there is only one big issue for all markets: the US payrolls report. We don’t have a strong view on the outcome of the payrolls. Nevertheless, we have the impression that any disappointment might be used as a good excuse for some additional profit taking on the stock markets. In theory this should also put the risks for EUR/USD to the downside. However, as indicated, we are not really impressed by yesterday’s USD performance. So, it will be interesting to see how strong the US carry trade story (and thus also reversal of carry trades) still is for markets. By default we suppose that the trick is still working.
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. 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 heading in the right direction. As soon as stocks resume their uptrend, the 1.5021 target (2nd target double bottom of 1.3739) might come in the picture.
On Thursday, USD/JPY had a slightly downward bias. However, there was not really a big story to guide the price action. The poor performance of the US stock markets and some disappointing US data were seen a good reason to sell the dollar against the yen. After all, the move was limited and we would not draw firm conclusions whether it is the dollar or the yen that will be the preferred safe haven in case the correction on the stock markets would continue. Nevertheless, one can not ignore that the yen is holding up very well. USD/JPY closed session at 89.60, compared to 89.70 on Wednesday.
This morning, Japanese eco data came out much better than expected but this didn’t help to change the course of events on the stock markets. Asian/Japanese stock markets joined yesterday’s correction of the US and European markets. Once again, this had installed a cautious yen positive bias in Asian trade this morning.
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 sometimes it had even reversed. The dollar (and not the yen) was said to have 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. On top of that, the change in talk from the Japanese authorities also caused profit taking on yen long positions shortterm. 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 87.10 (year low) area remains the next high profile target on the downside for this pair. Even as we have a long-term yen positive bias, we would not go yen long at the current levels as Japanese authorities will most probably continue to us verbal interventions to prevent a to swift rise of their currency.
On Wednesday, the technical rebound of sterling against the euro continued. There was not really hard evidence to support this move. On the contrary, the UK PMI from the manufacturing sector even came out below market expectations as it returned below the 50 mark. This only caused a temporary halt to the sterling rebound. Early in US trading the pair revisited the 0.9080 support area, but as was the case earlier this week, a break could not be forced. EUR/GBP closed the session at 0.9118, compared to 0.9159 on Wednesday.
Overnight, Nationwide house prices rose 0.9% M/M in September (unchanged Y/Y). The release was slightly above consensus but until now the reaction on the currency market has been limited. Later today, the construction PMI and the BOE Q2 housing withdrawal are on the agenda. Those series are no market movers. We expect more technically inspired trading.
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. 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 to add/reinstall EUR/GBP long positions. The 0.9080 area (previous high) has already been tested twice. So, its might become a hard nut to crack. Nevertheless, we could feel more comfortable to go long again in case of return action to the 0.9000/0.8984 support area.
