On Friday, it was correction time on the stock markets and according to the recent market logic this also put some downward pressure on EUR/USD. Stocks and EUR/USD took a decent start, but already during the European morning session some doubts crept into investors’ minds. Wasn’t this a good time to cash in some profits at the end of a very successful week? The move accelerated as soon as US traders joined the action and the results from GE and BOA failed to prop up investor sentiment. So, EUR/USD dropped from 1.49+ levels at the start of trading in Europe to set an intraday low in the 1.4850 area early in US dealings. The US data (TIC data, IP and Michigan confidence) gave a mixed picture and had no lasting impact on EUR/USD trading. EUR/USD soon found a bottom and the pair later even managed to regain some ground even as stocks continued to trade in the red. The pair closed the week at 1.4905, compared to a close of 1.4947 on Thursday evening. To conclude, EUR/USD lost a few ticks in step with the stock markets, but the damage could have been bigger.
In a press briefing, Eurogroup Chairman Juncker said that the current strength of the euro didn’t yet cause too much concern, but added that he may become concerned if the euro continues to rise. As was the case for several European policy makers recently, he was very happy that the US authorities reiterated that a strong dollar was in the interest of the US economy. Juncker added he would be happy to see markets take it into consideration. As usual, the Juncker headlines had no impact on the currency market. Nevertheless, we take once again notice that the value of the euro is becoming an ever more important item of debate among policymakers. The euro issue will also be a topic at today’s meeting of the Euro zone Finance Ministers.
Today, the calendar is very thin on both sides of the Atlantic. Fed’s Bernanke will give a speech on Asia and on the financial crisis. Usually, the Fed is rather reluctant to speak out on the value of the dollar. Nevertheless, it will be interesting to see whether Bernanke will address to problem of global imbalance more in depth. However, his introductory remarks for SF Fed conference this weekend didn’t bring any new insights. With respect to the stock markets, we expect a rather calm start to the new trading week. Apple and Texas Instruments report results after the closure of the US markets. EUR/USD lost some ground in Asia this morning with the financial newswires pointing to Friday’s comments from Junker. We see the move as a technical correction on the recent uptrend.
Global context: recently, the swings in risk appetite/risk aversion were the 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 stay dollar skeptical as long as we don’t get a clear signal that the Fed is coming closer to scale down its stimulating monetary policy. Recent signals from the Fed do not indicate that such a turnaround in policy is imminent. So, the long-term picture remains USD unfriendly. Nevertheless, the ongoing building up of USD short positions at some point will trigger a ST correction (cf. the price action in sterling last week). Such a correction most probably will occur in step with the stock markets. With respect to the latter, the jury is still out. Nevertheless, we have to impression that the upside of equities is becoming more difficult. This might also reduce the fuel that powered the EUR/USD rally recently.
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, but 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. 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 become more cautions on the ST upside potential in the pair. Partial profit taking on standing EUR/USD long positions can still be considered.
On Friday, the price action in USD/JPY showed an indecisive trading pattern. Initially, the pair extended Thursday’s technical rebound. However, the move slowed as soon as stock markets reacted negatively to the publication of the results of Bank of America and GE. USD/JPY reached an intraday low more or less at the same time when US stock markets indices did so USD/JPY closed the session at 90.89, compared to 90.55 on Thursday evening. So, on Friday, one might have got the impression that there was some kind of correlation between USD/JPY and the stock markets (with the yen slightly benefiting from bad news). However, in the recent past this link was far from consistent and often changed from one day to another. Trading is USD/JPY is still looking for a clear trading theme and is mostly guided by technical considerations.
This morning, the Japanese tertiary industry index came out slightly better than expected. The minutes of the previous BOJ meeting showed that some members were of the opinion that the effects of the central Bank’s corporate funding support were waning. This might support the case for letting these measures fading out at the end of the year. However the jury is still out on this item. Asian stocks markets are mixed this morning. Chinese markets are in positive territory. Most other markets showed very limited gains, if any. USD/JPY is holding close to Friday’s closing levels.
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. Last week, the pair moved above the first important resistance area at 90.50. We keep a wait-andsee approach and still hope to get the opportunity to resell higher.
On Friday, sterling extended the correction that started on Thursday. The move was technical in nature. There were no eco data to explain the move. During the European morning session, there were still some rather sharp swings. The pair even came close to the key 0.9080 support area. However, a real test of this level didn’t occur. Later in the session, the storm calmed down and the pair settled in the 0.9100 area.
Over the weekend, BoE’s Posen in an interview suggested that it was too soon to end the QE policy as the financial system has yet to recover fully. This doesn’t support the case for a swift sterling rebound. This morning, the Rightmove House Prices showed prices rising 2.8% M/M and also the Y/Y figure came out in positive territory (0.5%). However, this was not enough for sterling to extend last week’s gains. EUR/USD is being traded in the 0.9130 area at the moment of writing.
Later 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. Last week’s correction brought the pair back to the first important support area at around 0.9080. A break below the latter would suggest that the short-term negative bias toward sterling is changing. This is not our preferred scenario. Nevertheless, we still keep a wait-and see approach and look out whether the correction has already run its course. 0.8984 is the next point of reference in case of some additional follow-through price action on last week’s correction.
