On Wednesday, an increase in risk appetite caused the predictable dynamics on the currency markets. The dollar was sold against most other majors, including the euro. Positive global investor sentiment was supported by better than expected corporate results on both sides of the Atlantic. This was enough for the USD-downtrend to continue, but again without a real acceleration. So, the break above a key technical level (the 1.4845 previous high) once again didn’t reinforce the momentum of the trend. EUR/USD extensively tested the 1.4900 area but at first no sustained break occurred. The Eco data (US retail sales) were supportive to the global eco picture but had no lasting impact on EUR/USD trading. There was a brief spike higher in EUR/USD following the publication of the FOMC Minutes. The report contained a lot of mixed signals. However markets focused on the fact that some members still pondered the option of raising the amount of agency MBS purchases, which would de facto ease the monetary policy stance further. EUR/USD temporary jumped to the 1.4945 area on those headlines. However, calm returned and pair fell back after which it resumed its gradual, stock-market driven up-move. EUR/USD closed the session at 1.4925, compared to 1.4854 on Tuesday.
Overnight, Joseph Stiglitz, in an interview, urged the US authorities not to intervene in the currency market to slow the decline of the dollar. As such this is no big news. It only reinforces the view that there is still a rather broad consensus that the current dollar decline is necessary to facilitate the global rebalancing. The only ‘issue’ is that it should develop in a gradual way (this is more or less the case) and against the ‘right’ counter-currencies. This remains an issue of debate. In this respect, there were some headlines from Chinese policy makers stating that they don’t expect a reemergence of pressure for a sharp raise of the yuan. We don’t draw firm conclusions from these headlines. However, they don’t point to a near term change in China’s FX policy.
Overnight, RBA governor Stevens said that, over time, interest rates need to be adjusted towards a normal setting as the economy recovers. This supported the Aussie dollar against US one and, while there is no direct link with the situation in Europe, it supports the decline for dollar against the likes of the euro.
Today, the calendar is again interesting. In Europe, the final CPI figure for September will be published and also the US CPI figures are on the agenda. However, for now, inflation data don’t get much attention. The weekly jobless claims and the regional manufacturing surveys in the US are more interesting. Recently, some business sentiment indicators came out less positive than expected. It will be interesting to see whether this was a one-off event or not. In case of a reaction on the data, it should again go via the stock markets. So, in this context, good eco news still tends to be bad for the dollar and vice versa. However, even as the eco data might yield some interesting insights, the focus will continue to be on the corporate earnings and the stock market reaction. The Q3 earnings season took a marvelous start. We expect earnings to continue to come out on the better side of expectations, but how long (equity) markets will continue to react and when will the positive news be priced in? For now we assume that the positive stock market trend will remain in place and this will continue to support EUR/USD.
Global context: recently, the swings in risk appetite/risk aversion were the evident 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 on 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. Recent signals from the Fed (e.g. yesterday’s Minutes) do not indicate that such a turnaround in policy is imminent. Any correction on the stock markets might still have some impact on EUR/USD. In this respect, the earnings season is in full swing and the major (US) indices are trying to break above the cycle tops. More positive price action on the stock markets should put a strong floor for EUR/USD trading, too.
Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 and above the 1.4919 (Dec high) improved the picture. The move is not really spectacular and is developing in a rather gradual way. Nevertheless, the corrections are very limited, too. We don’t feel any need to row against the tide. The 1.5021 target (2nd target double bottom of 1.3739) is coming with striking distance.
On Wednesday, there were some intra-day swings in USD/JPY trading, but after all the pair stayed remarkably stable. Yesterday morning, the yen got a boost as Japanese Deputy Finance Minister Minezaki said in an interview that Japan should not conduct interventions as soon as the yen rises. However, there was no follow through price action. USD/JPY even reversed the earlier losses as soon as the better than expected results from JP Morgan hit the screens. Later in the session USD/JPY settled in a tight sideways trading pattern and closed the session at 89.44, compared to 89.71 on Tuesday evening.
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 looked to sell USD/JPY in case of a more pronounced up-tick hopeful in the 92/93 area. However, the recent price action might suggest that this area will be difficult to reach. The 90.50 area already looks like a hard nut to crack. The 87.10 (year low) area remains the next high profile target on the downside for this pair.
On Wednesday, sterling trading entered calmer waters. EUR/GBP settled in tight sideways trading pattern in the low 0.93 half. Slightly better than expected UK labour market data caused EUR/GBP to test the 0.93 area, but no break occurred. Later in the session, there was some market talk on an interview of BoE’s Fisher with the FT to be published today. The headlines suggested that the debate on extending QE was still very much alive. Fishers was also said to have indicated that the BoE’s forecasts for the economy were unlikely to be very much different from August. It is a bit difficult to assess what are hard facts and what is interpretation from the interviewer, but the market considered the message to be rather dovish. EUR/GBP jumped to the 0.9350 area and closed the session at 0.9342, compared to 0.9331 on Tuesday evening.
Today, the UK eco calendar is empty.
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. We were looking for a correction to go add/reinstall EUR/GBP long positions. We hold on to the view. The 0.9160 reaction low is the first important support level on the charts. The 0.9080 area remains the key point of reference. After yesterday’s consolidation, we have the impression that there is a window of opportunity for a ST correction lower in the EUR/GBP cross rate.
