On Tuesday, EUR/USD continued to trade within striking distance of the psychological barrier of 1.50 for most of the session, but a real test of this key level didn’t occur. At the start of trading, currency traders still kept an eye on the outcome of the meeting of the eurogroup finance Ministers. The declarations after this meeting showed mounting unease among European policy makers with current strength of the single currency. However, the official talk was not really different from the usual G7 mantra and from recent ECB talk as they took notice of the fact that a strong dollar is in the interest of the US. This analysis was not really big news for the currency market and it also suggested that any hard action to stop the ascent of the euro is still very unlikely at this stage. There were some remarkable comments from an adviser of French President Sarkozy as he suggested that a way for Europe to stop the rise of its currency was to print money and to create inflation (as he suggested the US is doing). However, we don’t have the impression that this view is shared by the ECB. Later in the session, the Bank of Canada in its policy statement also highlighted the negative consequences of a weak dollar for its economy. This triggered quite a substantial weakening of the Canadian dollar against the US dollar. However, we don’t have the impression that this kind of rhetoric is already becoming a factor of importance for overall sentiment towards the US currency. Markets obviously don’t believe that there will be a global move to stop the slide of the dollar anytime soon. So, currency markets soon returned to business as usual: watching the stock markets (and to a lesser extent the commodity markets). (European) Stock markets, still the most influential driver for the currency market, didn’t really know which way to go. A series of high profile US companies came out with better than expected data, but the US eco data (PPI, Building Starts and permits) spoiled the game. So stocks lost some ground early in US trading and this triggered a profit taking move in EUR/USD too. However the EUR/USD currency pair still closed the session well above the 1.4900 mark. (1.4945 compared to 1.4965 on Monday). So, global pictured hadn’t changed at all.
Overnight, Fed’s Yellen reiterated the view that a tightening in monetary policy in the US was not something she expected to happen over the next several months. Yellen made also some remarks on the dollar as she said that if the United States and Asian countries address the causes of the imbalances, these actions could increase confidence in the dollar. So, in this (US-based) view, the problem of the value of the dollar is not only a US problem, on the contrary.
Today, the European calendar is empty. In the US, some Fed members will make public appearances and the Beige book, preparing the next Fed meeting, will be published. Usually, the content of the Beige Book confirms recent data evidence. So, by default, the price action on the equity markets will again be the most important single driver for EUR/USD trading. Over the previous days, stocks held op well, but the upward momentum slowed a bit. At least for now, this also prevented a real test of the 1.50 barrier in EUR/USD.
Global context: recently, the swings in risk appetite/risk aversion were the drivers on the currency markets. 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. 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.
Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 and above the 1.4719 (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. However, as we come closer to the 1.50 mark and to our long-standing technical target of 1.5021 (2nd target double bottom of 1.3739), we become more cautious on the ST upside potential in the pair. Partial profit taking on standing EUR/USD long positions can still be considered. We wait for a correction to (re)establish EUR/USD long exposure.
On Tuesday, USD/JPY showed again some intra-day swings, but after all the indecisive trading pattern that is already in place for some time hasn’t changed. Global dollar weakness caused the pair to return close to the 90 area early in the session. However, a broader USD–short covering move later in the session (supported by weaker! than expected US data and their impact on the stock markets) helped USD/JPY to recoup the Asian losses. The pair closed the session little changed at 90.78, compared to 90.55 on Monday evening.
There were no eco data in Japan this morning. BOJ deputy governor Nishimura indicated that downside risks for the Japanese economy remained high. He also said that (the scaling back) of emergency measures is a different matter from exiting macroeconomic policy. Most Asian stock markets are marginally lower this morning, but the moves are too small to have any impact on the currency markets.
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, but the move didn’t go much further. We keep a wait-and-see approach and still hope to get the opportunity to resell higher.
On Tuesday, trading in sterling was still driven by technical considerations. The UK data eco data (Monthly budget data/ Money supply) had no lasting impact on trading. The EUR/GBP currency pair hovered sideways the lower half of the 0.91 big figure during the morning session. During the US trading hours, a brief correction in EUR/USD also filtered through into EUR/GBP trading. The pair went for a retest of the key 0.9080 support area, but a clear break didn’t occur. The pair closed the session at 0.9122, little changed from the 0.9110 area. So, the jury is still out whether correction has already run its course.
This morning, there are some headlines on the screens of an interview with BoE’s King as he said that interest rates ‘at some point’ will increase from the current record low levels. However, we didn’t see any info on timing of such move.
Later today, markets will keep a close look at the minutes of the previous BoE meeting. With the BoE you never know, but we expect that the Bank will keep all options open for the November policy meeting when it will receive a new inflation report to frame the next step(s) in its policy.
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 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 to add/reinstall EUR/GBP long positions around first important support area at 0.9080. A break below the latter would suggest that the short-term negative bias toward sterling is changing, which isn’t our preferred scenario though. For now we maintain a wait-and see approach and look out whether the correction has run its course. If the 0.9080 area would give away, 0.8984 is the next point of reference.
