On Friday, traders were focused on the key US payrolls report. Earlier last week, some nervousness had been building going into this key payrolls report. This nervousness apparently was justified as the report came out weaker than expected, showing again a rise in the number of job losses to 263 000 in September. However, the reaction in the currency markets was not really standard. In the first seconds after the publication of the report, EUR/USD spiked lower line with the price action on the stock markets. However, this dollar rebound against the euro was very shortlived. The pair soon revered the early losses and rebounded from the 1.45 area to test offers in the 1.4645/50 area only shortly after, as equities recouped initial losses. However, it might also be seen as another sign of underlying euro strength, already visible on Thursday. The payrolls reinforced the market feeling that Fed tightening is not around the corner, which is not really good news for the US currency. EUR/USD closed the session at 1.4576, marginally higher compared to the 1.4545 close on Thursday.
During the weekend, the G7 urged China to move to a more flexible exchange rate which should help to correct global imbalances. The statement was in line with comments made six months ago. According to sources, there had been quite some internal debate within the G7 on the weakness of the dollar. However, the communiqué repeated the usual mantra that ‘excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability’. So, it looks fair to conclude that a coordinated action to stop a gradual decline of the dollar is still far away. The US talk on its commitment to a strong dollar is also far from convincing as this commitment is made subject to the need for a rebalancing of global growth which pleads for ……further (gradual) weakening of the dollar!
Today, the eco calendar is only moderately interesting with the final services PMI’s in Europe and the non-manufacturing ISM in the US. We expect the latter to have only intraday importance for trading. The political news headlines from Europe over the weekend were mixed with Ireland giving approval for the Lisbon treaty and the socialist winning the elections in Greece. Later this week, markets will watch out for the US bond actions and the ECB meeting. We don’t expect Mr. Trichet to break new ground in the Banks monetary policy. We keep a close look at the US auctions, even if those actions went very well recently and were no issue for the currency market. However, a less successful US auction always contains the risk of some additional market nervousness on the dollar.
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 payrolls only reinforce the feeling that point hasn’t been reached. Any correction on the stock markets might still have some impact EUR/USD. However, as we expect corrections on the liquidity driven rally on the stock markets to be limited, we also see the downside in EUR/USD well protected. The price action after the payrolls confirmed this view.
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 came rather close to this area at the end of last week, but a real test didn’t occur. The risk is that this level won’t be reached. So, we would not wait too long to cover USD long exposure. As soon as stocks resume their uptrend, the 1.5021 target (2nd target double bottom of 1.3739) might come in the picture.
On Friday, USD/JPY reacted the opposite way compared to most other USD cross rates. The pair dropped immediately after the US payrolls report, but soon reversed the early losses. This might have been due to the reaction on the stock markets (European stocks reacted quite sharply immediately after the publication, but the US equity futures rapidly rebounded. Tactical considerations might have played a role, too. As USD/JPY was coming rather close to the year lows (87.10), markets were probably still a bit nervous on potential action from Japan if the rise of the yen against the dollar would go too fast. So, after a brief dip, USD/JPY returned to prepayrolls levels and closed the session at 89.81, little changed from the 89.60 close on Thursday.
This morning, Asian stock markets show again moderate losses. After the G7 meeting, the Japanese Finance Minister was quoted that ‘if currencies show some excessive moves in a biased direction, we will take action’. So, official talk is clearly moving away from the previous rhetoric that the new government is not pursuing a weak yen. Fuji obviously is trying to restore some two-way price action in yen trading, but we don’t think that currency interventions are around the corner yet.
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. 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 short-term. The situation in USD/JPY is paralysed. We still look to sell USD/JPY 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. 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 use verbal interventions to prevent a to swift rise of their currency. The 92/93 area might be a good entry point if the correction would go that far.
On Friday, technical considerations continued to dominate the price action in EUR/GBP. Global uncertainty ahead of the payrolls also kept sterling under pressure. The EUR/USD rebound after the payrolls even caused EUR/GBP to revisit the 0.9197 area at the end of the European session. However, as global pressure eased later in US trading, sterling entered calmer waters and the UK currency, after the close of the European/UK markets even regained most part of the earlier losses. EUR/GBP closed the week at 0.9141, compared to 0.9117 on Thursday.
Today, the UK calendar contains the PMI survey from the services sector. The figure is expected to show a further improvement from 54.1 to 54.5. However, after last week’s disappointing reading for the manufacturing PMI, the risk might be to the downside for the services measure, too.
Global context: Since early August sterling sentiment deteriorated again. 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. Last week, there was some unwinding of overextended sterling short positions. Recently, we were looking for a correction to go 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 would feel more comfortable to go long again in case of return action to the 0.9000/0.8984 support area.
