On Monday, trading took a rather slow start in the FX market. EUR/USD gained a few ticks at the open of the European markets and tested offers in the 1.4650 area, in line with the positive open on the European stock markets. However, there was not really a big story to drive the price action. The G7 didn’t show any intention to halt the gradual slide of the dollar. In an interview, ECB’s Trichet indicated that a number of currencies had to progressively and orderly appreciate vis-à-vis the both the dollar and the euro. He also made it clear that the rebalancing of the global economy did not at all imply a change in the bilateral position of the euro against the dollar. These headlines had hardly any impact on EUR/USD trading. Nevertheless, it is quite remarkable to hear the ECB president making some, albeit very moderate comments, on the currency issues as he did over the previous days. Usual the ECB as much as possible tries to keep out of these currency discussions. During the day, the pair drifted without momentum south again going into the release of the US ISM non-manufacturing report. Contrary to the manufacturing measure last week, business confidence in the services sector came out better than expected. The release reinforced the positive sentiment on the equity markets. EUR/USD move a few ticks higher immediately after the release and surprisingly continued a slow grind higher that would last nearly to the end of the US session, leaving EUR/USD at 1.4648 in the close compared to 1.4576 on Friday evening.
Overnight, the dollar came under more pressure as the market concentrated on an article in the Independent article that citing unidentified sources said that the Gulf States are in secret talks with key oil players like China, Japan, Russia and others about replacing the dollar by a basket of currencies including yen, yuan, euro, but also gold and a new unified Gulf currency in the trading of oil. Such talk regularly pops up and keeps currency markets busy. It of course fits well with the current dollar negative sentiment. We admit that in a longer term perspective the hegemony of the dollar will erode further and further, as it already did in the past decade. It goes hand in hand with the decline of the geopolitical and economic power of the US. The establishment of the G-20 as the most important forum for global economic issues to the detriment of the G-7 and the defeat of Chicago, supported by Obama, as the organizer for the Olympics 2016 are some other signs of the decline of the power of superpower US. It is difficult to know whether this article will have some longer lasting impact than a few hours. However, following some correction in favour of the dollar in the past fourteen days, it looks that the dollar may again be on the defensive. The dollar index (USDX) currently at 76.33 is again close to the 75.827 low and the attraction of that level might be too strong for the market to resist.
Today, the eco calendar is again near empty. Attention may go further to the Gulf story (see higher) and to the gyrations on the stock markets. The US 3 year T-Note auction might have some impact, especially should it fail. However, this is unlikely, recently auction attracted huge demand and this was confirmed in yesterday’s 10- year TIPS auction. On top of that, in case of investor’s unease with US Treasury paoer, it is more likely to be visible in auctions of longer term paper, not in the 3-year tenor. So, after all, we don’t expect it to have a lasting impact on EUR/USD trading.
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 US payrolls report only reinforced the feeling that point hadn’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, the downside in EUR/USD well protected. In the last 24 hours it even looks that the pair might again go for a test of the recent highs. In this respect, the ECB may feel the need to come out ever more forceful and the ECB meeting and the subsequent press conference might offer Trichet the opportunity to make his point.
Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 improved the picture. 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 again in the picture.
On Monday, trading in USD/JPY showed also a very lackluster trading pattern. The pair gained some ground early in Asian trading, but soon settled in a very narrow trading range just below the 90-mark. The recent warnings from the Japanese Finance Minster apparently made short-term investors more cautions to go yen long at the current levels. Nevertheless, the upside in USD/JPY obviously remains difficult. Later in the session, the pair fell through some intraday support levels (notably at around the time of the better than expected US ISM from the manufacturing sector). We wouldn’t make much out of this. Just consider it technical trading in a rather thin market. USD/JPY closed the session at 89.53 compared to 89.81 on Friday evening.
This morning, there were no important data on the agenda in Japan, but the newspaper report on secret talks between countries to replace the dollar by a currency basket for oil trading purposes affected USD/JPY too. The currency pair is currently trading just below the 89 handle. It is obvious that a weakening of the dollar in the context of a rebalancing of the global economy should occur vis-à-vis the Asian surplus countries, the yuan, yen and others. The Japanese government doesn’t want this to happen in a disorderly way. So, the market will be cautious and aware of potential verbal or real Japanese 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. 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 Monday, trading in the EUR/GBP currency pair was a bit more inspiring compared to what happened in most other crosses. However, at the end of the day, the changes in the pair were also limited. Sterling overcame some initial losses as the UK PMI for the services sector came out remarkably strong at 55.3. However, once again, the sterling rebound had no strong legs and EUR/GBP returned to the intraday highs in the 0.9180 area. Positive market sentiment later in the session again slowed the decline of sterling, but couldn’t prevent some more sterling losses. The pair closed the session at 0.9193, compared to 0.9141 on Friday.
This morning, sterling remains under pressure on the global dollar theme and EUR/GBP is exploring the territory north of 0.92, as the pair change hands currently at 0.9217. Later today the UK industrial and manufacturing production data, the Halifax housing prices and possible the NIESR GDP estimates are expected. Production is expected to be up very slightly, while the Halifax might confirm that house prices have bottomed. We suspect though that these data would have a lasting impact on trading.
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.
