On Thursday, overall dollar weakness was still the name of the game. Asian markets are in the focus with a lot of trader talk on USD buying from several Asian central banks. The strong gains of the Aussie, after a much better than expected Australian labour market report, reinforced the view that the wider Asian region is taking the lead in the global economic recovery. This also fuels market speculation that the several central banks in the region will be forced to join Australia in raising rates in the near future. The overall dollar weakness led EUR/USD to rise from 1.4690 to 1.4770 at the end of the Asian session. The pair hovered sideways in the European morning session, as traders were nervous ahead of the ECB meeting and the press conference. Trichet had recently upped its rhetoric and said that global rebalancing should not lead to dollar weakening against the euro. He added that other currencies, those of the emerging world should appreciate. This showed that the concern of the ECB about the dollar weakening (to the euro) had increased. So, the market was very attentive whether Trichet would still go further during his press conference. That didn’t happen though. He sounded even less concerned if one takes his comments literally, but we wouldn’t draw that conclusion either. Yesterday, he once more emphasized that Treasury Secretary Geithner and Ben Bernanke said that a strong dollar is in the interest of the US and he added of the global economy. Some in the market considered Trichet’s words as a backtracking and EUR/USD spiked to about 1.48, but soon retreated. Later on the pair once more went up, setting an intra-day high at 1.4818, but there simply was enough news to make more headway. The market stabilized near the highs, closing at 1.4694, up one big figure.
Overnight, the dollar regained some strength and currently trades at 1.4720. The Bank of Korea didn’t hike rates, Japanese machine orders were weak and talk continued about some central banks buying dollar. While this certainly doesn’t happen in a coordinated way, the fact central banks appear in the market is certainly keeping traders worry about potential interventions. This may be considered as helping the dollar currently, but we would think that the dollar gains are maybe more the result of some profit taking after a good run and with the dollar near important support levels (dollar index hit previous low, but couldn’t break below yesterday).
Today, the eco calendar is again thin with the US trade balance and French and Italian production figures as the only eco releases worth noting. However, we suspect these releases to have at best some temporary effect. Given the comments above, we may see calm trading today and maybe some profit taking in euro long positions. That may set the stage for more decisive price action next week. We cannot belief that the pair remains hovering near current levels. The dollar selling should accelerate or dollar bears may decide to give up the battle for now. US equities may be part of the game as they are near key resistance.
Global context: recently, the swings in risk appetite/risk aversion were the obvious drivers on the currency markets. In this context, improving investor sentiment toward risk is still considered a good reason to sell the US dollar. On top of that, in this low yield environment, the dollar has become (or is at least perceived to have become) the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs, some international debate the status of the dollar and 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. 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 is well protected.
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 (1.4844). However, there was no followthrough action on this ‘break’ yet. Following a correction, that narrowly missed the 1.4438/50 break-up area, put forward as offering a good opportunity to step in again, the pair is again closing in on the 1.4844 resistance. If the stock market rebound continues, the 1.5021 target (2nd target double bottom of 1.3739) might come again in the picture and the technical picture would get yet another EUR bullish upgrade.
On Thursday, USD/JPY had a quite volatile, but sideways trading session in the 88.70 to 88.20 range. Initially the yen strengthened on the overall dollar weakness, but as Wednesday low couldn’t be taken out, some modest return action occurred, leaving the pair at 88.39, about 20 ticks below the previous close.
Overnight, the dollar rebounded. Technicals, the inability of USD/JPY and of the Finnex dollar (trade weighed) to break below recent key support levels played a role. However, also unexpected weak Japanese machinery orders were yen negative. Some commentators referred to remarks of Ben Bernanke to explain the dollar strength overnight. Bernanke said that the very low rates may be sustained for an extended period of time (something already in the September FOMC statement), but analysts attributed some hawkishness to his comments that the Fed had the tools and ability to pull back its liquidity and would at some point decide to tighten policy. This looks to us very innocent talk for a central banker. The question is not whether the Fed has the right tools, but more when the Fed would tighten policy and on this there was no sign Bernanke would rush the Fed in changing its current very loose policy. So, we don’t think Bernanke’s comments have much to do with the dollar revival overnight.
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 slowed the ascent of the yen. So, the situation in USD/JPY has become a bit 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 longterm 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.
