On Tuesday, the correction on global (equity) markets that started on Monday evening continued and this time EUR/USD joined the move. However, there was no sense of panic at all. It developed in a very gradual way. European equities soon found a bottom and EUR/USD initially hovered in the 1.4900/1.4850 area. The US data were mixed. At first a better than expected CS house price release seemed able to block the correction. However, later on weaker-than-expected consumer confidence and Richmond manufacturing sentiment caused a return of risk aversion. Equity indices drifted into to red and EUR/USD tumbled to the 1.4800 area and even tested bids in the 1.4770 area after the close of the European markets. Apparently, overextended long positions still had to be scaled down. The pair closed the session at 1.4804, compared to 1.4876 on Monday evening. Of course, the link between stocks and equities and stocks is and should not always be one-to-one, but given the price action on the stock markets, the performance of EUR/USD should be considered as a bit disappointing, given the very limited losses on the stock markets. Nevertheless, the at least for now, the current move in EUR/USD is still nothing more than an overdue correction on a longstanding rally.
The eco calendar heats up today. In Europe, the German regional CPI’s are scheduled for release. In the US, the mortgage applications, the durable orders and the New home sales will be published and the later in, the session, markets will take a look at the US five year T-Note auction. With respect to the latter, US auctions recently went very well. So, until now, the huge volumes of US government bond sales were no negative factor for the dollar. Regarding, the data, markets expect an improvement for both the durable orders and the new homes. In case of a positive figure, it will be interesting to see whether this will be enough to halt/slow the correction in EUR/USD. After the recent longstanding moves in both EUR/USD and equities, we wouldn’t be surprised to see the correction going a bit further. We don’t overemphasise the argument, but the Aussie dollar losing ground despite (slightly) higher than expected inflation data suggests also that investors are still inclined to reduce riskier assets, including currencies.
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 in step with the stock market rally apparently has run its course short-term and this triggered a correction earlier this week. This scaling down of overextended long positions could still a bit further.
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, until now, the corrections are very limited, too. However, as we had reached our long-standing technical target of 1.5021 (2nd target double bottom of 1.3739), we turned more cautious on the ST upside potential in the pair and advised partial profit taking on standing EUR/USD long positions. We hold on to that view and look for further correction to (re)establish EUR/USD long exposure. The daily channel bottom (today at 1.4671) is a first important level. A sustained break below this level would question the short-term EUR/USD positive bias. This is not our preferred scenario. If we are wrong on this call, the 1.4445 previous high is the next high profile support.
On Tuesday, USD/JPY trading was confined by a tight trading range roughly between 92.32 (top in Asia) and the 91.70 area. The link between USD/JPY and the performance of the stock markets was again not easy to make. Technical considerations continue to guide price action. Nevertheless, we have the impression that risk aversion is becoming somewhat of supporting factor for the yen again, more than was the case in the recent past. USD/JPY closed the session at 91.80, compared 92.19 on Monday.
Overnight, USD/JPY slipped further south. A scaling down of positions in the likes of AUD/JPY probably played a role. Japanese retail sales were better than expected, but this was not enough to save the Japanese stock market. Going into this Friday’s policy meeting, the debate whether or not the BOJ should extend its programs to support corporate financing continues. Today, one of the government’s representatives at the BOJ defended to Banks autonomy to take the action it thinks is necessary. However, the debate is far from finished.
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. The 92 area has been reached yesterday. We have the impression that the shortterm picture in USD/JPY is become toppish. So, short-term players might consider reinstalling USD/JPY short positions for return action lower in the recent trading range.
On Tuesday, the rebound of sterling continued. This was in the first place the case of against the euro. In cable, there was quite some intraday volatility, but at the end of the day, the UK currency still recorded some gains against the dollar. The negative news flow at the end of last week caused a new sell-off of the UK currency. However, such a correction is still used as an opportunity to scale down overextended sterling long positive. A better than expected CBI distributive trade reports only reinforced the sterling positive correction. EUR/GBP drifted south, almost from the start of trading in Europe till the close in the US. However, a test of the key 0.9000/0.8984 area didn’t occur. The pair closed the session at 0.9042, compared to 0.9105 on Monday.
Today, the UK calendar is empty. So, global factors and even more technical considerations will continue to set the tone for trading in sterling. The high degree of uncertainty going into the next week BoE meeting contains the risk of ongoing market nervousness and a higher volatility. In the current environment, we keep a close eye on the technical picture. The 0.8984 area is key.
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 and this applies also to the October meeting. However, the Minutes of that meeting nevertheless attracted the attention. Some observers correctly noted that in contrast to September meeting, the more dovish MPC members didn’t re-state there preference for more QE, making such an expansion of the QE unlikely, especially as some MPC members including governor King in a newspaper had become slightly more optimistic on the economy. We were not sure whether such an interpretation of the Minutes was correct and we probably only know at the next MPC meeting in early November. However, the weak Q3 GDP figures show the debate on QE is entirely open. This question will dominate markets in the next ten days. We have a long-standing sterling negative view and don’t feel any need to change it at this stage. We were looking to add/reinstall EUR/GBP long positions around first important support area at 0.9080, but given the violent correction refrained from doing it and adopted a waitand- see attitude. Last week, the pair tested the key 0.9000 area, but the test was rejected. Friday’s post GDP rally made us again more comfortable with our sterling skeptic bias, but we still want some confirmation of the sterling weakness (EUR/GBP should hold above the key 0.9000/0.8984 area) before adding to the position. The price action of the previous two sessions suggested that the unwinding of LT sterling short-positions is not completely worked out yet.
