On Thursday, trading in EUR/USD was guided by conflicting signals. Early in the session it looked as if the pair would go for a test of the psychological level of 1.50, but the move lacked the power to do so. Stocks were in a wait-and-see mode ahead of a next batch of earnings releases. The results of Goldman Sachs were better than expected, but markets considered it as a good reason to cash in some profits on the recent rally. A temporary correction on the stock markets dragged also EUR/USD lower. However, this move had no strong legs either. A better than expected New York Empire manufacturing survey already made investors doubting whether this was the right time to take their money of the table and the correction in EUR/USD stalled, too. So after all, the pair showed some consolidation on the recent rally but in a broader perspective, the picture hardly changed. ECB’s Trichet in a speech didn’t bring any high profile new insights on the monetary policy developments going forward. On the euro, the ECB President answered a few questions. He repeated it was very important that US authorities said they would pursue policies that take into account that a strong dollar is in the interest of the US. He also indicated that euro was not created to be a global reserve currency and that the bank never had a plan to promote a global use of the euro. Later in the session, EUR/USD found again a better bid as US stocks reversed the early losses. The pair closed the session at 1.4947, compared to 1.4925 on Wednesday.
Overnight, a series of US officials including US Treasury secretary Geithner repeated their strong dollar bias and the commitment to run a policy that should support the role of the dollar as the dominant currency. The declarations had no noticeable impact on the currency market. Nevertheless, it is worth to take notice of the fact that policy makers on both side of the Atlantic have recently spoken more frequently on the need for a strong dollar than they used to do a few weeks or months ago. The US in a report to Congress also said it was seriously concerned about the value of the renmimbi, but didn’t accuse China of being a currency manipulator. The report has also no impact on currency trading.
Today, the European calendar is thin. In the US, the industrial production data and the Michigan consumer confidence are on the agenda. The latter probably might have some intraday impact on EUR/USD trading. Stock markets will keep an eye on the results of General Electric and Bank of America.
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. this week’s Minutes) do not indicate that such a turnaround in policy is imminent. So, the long-term picture remains USD unfriendly. Nevertheless, as was the case with sterling short positions, an ongoing building up of USD short positions at some point will trigger a correction. Such a correction most probably will occur in step with the stock markets. With respect to the latter, the jury is still out.
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 continued to develop in a rather gradual way. Nevertheless, the corrections are very limited, too. We still don’t feel any need to row against the tide. Nevertheless, as we come closer to the 1.50 mark and to our long-standing technical target of 1.5021 target (2nd target double bottom of 1.3739), we tend to become a bit more cautions on the ST upside potential in this pair. Partial profit taking on standing EUR/USD long positions for sure can be considered.
On Thursday, USD/JPY staged quite a remarkable rebound. On top of that, while the dollar had to give up a big part of its earlier gains against the euro later in the session, USD/JPY managed to preserve the earlier gains. The better than expected US data (claims and Empire manufacturing survey) and the stock market rebound later in the session apparently was more of a support for USD/JPY than for other USD cross rates. USD/JPY closed the session at 90.55, compared to 89.44 on Wednesday. A steep rise of sterling might have played a role in yesterday’s decline of the yen too (unwinding of GBP/JPY shorts).
The Japanese Finance Minister Fuji defended his right to speak out on currencies, but again played down/ignored his pleading for a stronger yen. He said he never favoured a weak or a strong yen, but repeated that Japan should not rely too much on exports for economic growth.
This morning, there were no important eco data in Japan.
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 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. Recently, we indicated that we were looking to sell into a more pronounced up-tick, hopefully in the 92/93 area, but we had become a bit worried whether this level would be feasible. The pair is currently trying to move above the first important resistance area at 90.50. We keep a wait-and-see approach and hope to get the opportunity to resell higher.
On Thursday, sterling performed quite an impressive rebound. Market chatters still linked the move to the FT interview with BoE’s Fisher as he said that the quantitative easing is working now and that, at some point, the BoE might take a pause in its QE. We are not really impressed by this explanation. The content of the article was already available on Wednesday. On top of that we didn’t read any high profile new info in it. So, the move most probably should be considered as a technical correction in a market that was extremely positioned sterling short. So EUR/GBP dropped below the 0.93 at the start of trading in Europe and the pair pushed ever lower to reach an intraday low in the 0.9145 area at open in the US. Later in the session the pressure eased and EUR/GBP closed the session at 0.9186, compared tpo 0.9342 on Wednesday evening.
Overnight, some additional scaling down of GBP/JPY short positions triggered some further sterling gains across the board.
Today, the UK eco calendar is again 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. Yesterday, we indicated that we had the impression that there was a window of opportunity for a ST correction lower in EUR/GBP. To be honest, we couldn’t image the correction to be as forceful as it occurred yesterday. Recently, we put forward the 0.9160 and 0.9080 levels as potential targets of a correction. A break below the latter would suggest that the short-term negative bias toward sterling is changing. This is not our preferred scenario. Nevertheless, after yesterday’s forceful correction, some additional followthrough price action can’t be excluded.
