On Wednesday, stock markets traded very volatile. At first, they seemed ready for the long overdue correction, but following a batch of strong earnings results they rallied strongly, matching, but not breaking the recent highs (1100 for S&P), only to plunge lower in a late session sell off. Obviously, in the absence of important eco data on both sides of the Atlantic, equities were in command on the forex markets, but the dollar reaction on equity gyrations was once again asymmetric, showing the still bearish sentiment on the dollar. Indeed, equity weakness in the European session pushed the dollar barely stronger, notably from EUR/USD 1.4965 to 1.4910 in early US session. However, when equities turned North and subsequently rallied strongly following opening of the stock exchange, the dollar was heavily sold moving first to the EUR/USD 1.50 mark and after a small pause the pair even set a new high at 1.5048. Very late in the session, equities hit the skids allowing the dollar to erase a small part of the losses, ending the session at EUR/USD 1.5016, which compares with the 1.4944 close on Tuesday. Overnight, EUR/USD lost a few insignificant ticks and trades currently near 1.50.
So concluding, equities are still affecting EUR/USD, but in an asymmetrical fashion and the downward correction of EUR/USD is at least until now not important. Nevertheless, also because of technical reasons, we are still looking for such correction to take place.
While it hadn’t any immediate impact on the currency, we noticed that Obama adviser Summer said that the dollar status as global reserve currency is not in jeopardy, while a French advisor of president Szarkozy said the euro’s strength against the dollar has not only disadvantages, which were emphasized on Tuesday, but also advantages like lower fuel costs.
Today, the eco calendar is somewhat more interesting with the US jobless claims and leading indicators and French & Belgian business confidence. However, EUR/USD trading will again be inspired by the gyrations on the stock markets and technical considerations.
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. In this respect, the inability to clear the 1100 level (S&P) yesterday and the late session sell-off might indicate a correction might be around the corner.
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. However, as we have reached our long-standing technical target of 1.5021 (2nd target double bottom of 1.3739), we are more cautious on the ST upside potential in the pair and advice partial profit taking on standing EUR/USD long positions. We wait for a correction to (re)establish EUR/USD long exposure.
On Wednesday, USD/JPY stayed out of the scrimmages in the currency markets, as was already the case in previous sessions. The pair is hovering in a tight range without much momentum. So yesterday trading occurred in the 90.50 to 91.28 range with a close at 90.97, little changed from the previous close at 90.78. Worth mentioning the boss of Renault/Nissan Ghosn warned that yen strength wouldn’t stay without consequences for the manufacturing of Nissan inside Japan.
This morning, both the eco data and other news items were rather downbeat. The trade surplus shrunk unexpectedly to JPY 58.6B with exports down for the third month in a row, suggesting that the strong yen is hurting exporters. The all industry activity index surprised on the upside, but couldn’t alleviate widespread fears that the Japanese economy will remain mired in the problems on deflation, high fiscal deficits and ever growing public debt. So, market talk is that such an environment is not one in which the yen should be a star performer. The Nikkei traded down for most of the overnight session, but started to rally recently for a reason that we still didn’t discover. USD/JPY moved to 91.43, effectively testing the top of the recent range at 91.32.
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 Wednesday, sterling was again one of the eye-catchers, as it staged another upleg, extending the short squeeze that took place at the end of last week. EUR/GBP drifted already lower from the start of trading in Europe. BoE Governor King mentioned in a newspaper that interest rates at some point will have to return to normal. This caused EUR/GBP to extensively test the 0.9080 support area. The break of this level, however, occurred after the publication of the Minutes of the October BoE MPC meeting. The bank took notice of some improvement both in the worldwide economic data and in markets. The text also mentioned the decline of sterling. There was little new in the Minutes, but some observers correctly noted that in contrast to September the more dovish MPC members didn’t re-state there preference for more QE, making such an expansion of the QE unlikely. We are not sure whether this omission has been intentionally and whether some importance should be given to it. We’ll probably only know at the next MPC meeting in early November. Whatever the case, without any doubt, it bolstered the sterling, under the assumption that it might have been the very first, shy turn towards a less easy policy. For now, we are a bit reluctant to read a high profile U-turn in the October Minutes. However, for the (currency) market it was enough to trigger a next GBP short squeeze. EUR/GBP left the 0.9080 area behind and tested the 0.90 area in US trading. So, the 0.8984 (Sept 23 low) comes in the picture. Later in the session some profit taking occurred and EUR/GBP recouped part of the losses, leaving the pair at 0.90407 in the close, down from 0.9122 on Tuesday evening. Overnight, sterling regained some strength, but currently the pair changes hands near yesterday’s closing levels.
The UK retail sales are on the agenda today, but markets will already look forward to tomorrow’s Q3 GDP release too. We don’t have a strong view on the outcome of today’s retail sales release. Nevertheless, in the current environment, a better-thanexpected figure could trigger some additional nervousness among GBP-shorts prolonging the violent short covering move.
Global context: Since early August, sterling sentiment deteriorated again. The BoE decision in August 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 suggests that the short-term negative bias toward sterling is changing, which isn’t our preferred scenario though. We are cautious to change track, as the Minutes are insufficient clear to us to deduct that the MPC has completely left the idea of extra QE purchases. For now we maintain a wait-and see approach and look out whether the correction has run its course. The 0.8984 support level is the next point of reference.
