On Monday, EUR/USD trading developed in environment devoid of economic data. On top of that, US trading activity was lower than usual due to the Columbus holiday. So, technical factors were the key factors for trading. EUR/USD started trading in Europe close to the intraday lows from Friday. However, the dollar rebound failed to continue and the single currency gradually regained the Friday losses. So, the markets didn’t build on theme that the Fed might come closer to a reversal of its accommodative monetary policy, as was the case on Friday after Mr. Bernanke’s speech on the Fed’s balance sheet. A positive stock market reaction to the results of Philips also supported to euro positive sentiment. So, EUR/USD throughout the session reversed Friday’s correction and closed the session at 1.4773, compared to 1.4732 on Friday evening. An ongoing strong bid in EUR/GBP and, to a lesser extent also in EUR/JPY, through the crosses added to the EUR/USD gains.
Today, the calendar is moderately interesting. European markets will take a look at the ZEW economic sentiment. However, at the current juncture, we think that the corporate earnings will be more important for global market sentiment rather than an indicator like the ZEW. The US calendar only continues some second tier economic indicators. A speech from Fed’s Kohn on the economic outlook is interesting, but we don’t expect him to break new ground. So, global sentiment and technical considerations will continue to set the tone for trading in EUR/USD. The results of Intel might help to shape global sentiment today.
Global context: recently, the swings in risk appetite/risk aversion were the obvious drivers on the currency markets. In this context, improving investor sentiment towards 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. We don’t expect a turnaround in policy anytime soon. Any correction on the stock markets might still have some impact on EUR/USD. In this respect, the earnings season is coming in full swing this week and as the US indices are near the cycle top and close to key resistance, it may be a break or make week for equities this week.
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 closed again in on the 1.4844 resistance last week, but again the move missed momentum. If the stock market would take out key resistance, 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. If equities fail to break higher this week and fall a prey to profit taking, EUR/USD may again slid lower in the range with 1.4438/50 still major support. It is still early days, but at this stage, we prefer the scenario of a positive stock market reaction to reported earnings which puts the risk for EUR/USD also to the upside?.
On Monday, at first, the rebound of the dollar against the yen continued. Some additional market repositioning after the hawkish market reading of last week’s comments from Bernanke might have played a role to scale down USD/JPY short positions. So USD/JPY reached intraday highs in the 90.45 area at the start of trading in Europe. However, as was the case in most other cross rates, the USD rebound stalled and the USD/JPY returned to the 90-area. USD/JPY closed the session almost unchanged at 89.82, compared to 89.78 on Friday evening. With Japanese market being closed yesterday and reduced trading activity in the US we wouldn’t give too much weight to yesterday’s price action in this currency.
This morning, most Asian stock markets are moderately higher. USD/JPY is a few thick higher compared to the closing levels yesterday evening. In a day-to-day perspective, we have to impression that the yen positive momentum is waning a bit. Interesting to see whether there is room for some more upside in this pair (for example supported by a more constructive EUR/JPY sentiment).
Global context: USD/JPY reached a reaction high in the 97.80 area early August. Despite 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.
On Monday, the sterling sell-off continued unabatedly. A report from the CEBR indicating that it expected British interest rates to stay at 0.5% until 2011 and that they wouldn’t rise to 2% until 2014 added to the sterling negative sentiment. These kinds of reports only confirm the market feeling that the BOE is in no position to withdraw policy stimulation anytime soon. The BOE will probably even be a laggard rather than a frontrunner in this process. The headlines on the precarious situation of the UK budget are also no support for sterling. Prime Minister Brown in an interview advocated also that the UK must maintain stimulus until the recovery is certain. However, he also indicated that when the Bank makes the decision to suspend QE, that he will be able to support it. Of course, on this is issue, timing is everything. EUR/GBP performed another upleg and pair closed the session at 0.9351, compared to 0.9296 on Friday evening.
Overnight, the BRC retail sales and the RICS house price balance came out better than expected. At least for now, those data were not able to change the course of events for sterling.
Later today, markets will watch out for the UK inflation data. The CPI is expected to decline from 1.6% to 1.3%, the lowest since October 2004. We keep a close look at the speech of BOE Bean on the economy. Markets will keep a very close eye on any indications whether the bank still considers to raise to amount of asset purchase. The final verdict will only come at next months meeting (on the basis of a new inflation report). However, any signs that the Bank is coming closer to the end of its asset purchases might at least temporary slow the decline of sterling.
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. Recently, we were looking for a correction to go add/reinstall EUR/GBP long positions. However, yesterday’s break beyond the 0.9300 resistance are triggered another EUR/GBP upleg. We continue to avoid all sterling long exposure, but we don’t jump in anymore as we have to impression that the markets is becoming uni-directionally positioned short sterling. The 0.9490 (Febr. High is the next high profile resistance on the charts).
