On Wednesday, the correction global markets continued and the currency market was no exception to this rule. Scaling down/taking profit on positions in riskier assets was the name of the game of the game. The unwinding of carry trades favoured the dollar (and even more the yen). European stock markets were already under pressure from the open, but at first the damage for EUR/USD was rather limited. The pair gradually drifted to the 1.4800 area. At the start of US trading, the correction on the stock markets slowed temporarily, supported by a decent US durable orders release. However, a disappointing US new home sales release spoiled the game again. A new selling wave on the equity markets kicked in and this time the euro was hit quite hard, too. Negative headlines and uncertainty on the European banking sector probably added to the euro negative sentiment. The EUR/USD pair dropping below Tuesday’s low reinforced the move and EUR/USD slipped to test the 1.4700 big figure, coming close to the long standing uptrend line at in the 1.4680 area. The pair closed the session at 1.4706 compared to 1.4804 on Tuesday evening.
The eco calendar is well filled. In Europe, the sentiment indicators from the European Commission will be published. Usually they are no market movers. However, in the current euro negative sentiment, negative surprises, if they would occur, might be used to extend the current move. However, regarding the data, the focus will be on the advanced release of the US Q3 GDP. Markets expect an annualised growth rate of 3.2%. We don’t expect a negative surprise for this figure. However, in the current environment, such an outcome would only add to the market nervousness. It is still a bit strange, but in current market thinking (swings in risk aversion/risk appetite) such a bad figure would be USD supportive. On the other hand, one can raise the question whether a better than expected figure would be able to stop the current correction on the stock markets. On top of that, will a better outcome raise speculation on the timing of the Fed’s exit from QE? Such a scenario in theory would also not be that bad for the dollar. So, the currency markets have different themes they can react, too. For now we assume that the risk aversion/risk appetite paradigm will continue to set the tone for trading. As we don’t have any indication that the correction on the stock markets will halt today, we keep a wait-and-see mode and don’t try to catch the falling knife even as we stay dollar cautious longer term.
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 still look to (re)establish EUR/USD long exposure. However we are not in a hurry to do so. The daily channel bottom (today at 1.4696) is a first important level which is currently under test. A sustained break below this level would question the short-term EUR/USD positive bias. This is not our preferred scenario, but we closely watch today’s price action. If we are wrong on this call, the 1.4445 previous high is the next high profile support.
On Wednesday, risk aversion was the key factor for trading on all markets. Over the previous weeks, in a global positive context, there were some doubts which currency was the favoured currency for funding carry trades, the dollar on or the yen. This made the link between USD/JPY trading and the stock markets quite loose. However, yesterday’s price action illustrated that, as soon as the storm heats up, the yen still has some role to play as safe haven. So, as the correction on the stock market continued, USD/JPY continued to drift gradually lower throughout the session. The pair closed the session at 90.75, compared to 91.80 on Tuesday evening.
Overnight, the Japanese/Asian stock markets extended the slide from yesterday evening in the US. There were heavy losses at the start of the session, but later in the session, the sell-off slowed. USD/JPY slipped further south this morning. Japanese industrial production figures for the month of September came out slightly better than expected at 1.4% M/M. As usual, this was not a major factor for trading. Markets also keep a close eye on tomorrow’s BOJ policy meeting. Will the bank extend its programs to support corporate financing? Recently, several members of the Japanese government indicated they would not be that happy if the BOJ would withdraw its support for the economy. This is an interesting debate to assess the independence of the BOJ. However, we don’t have the impression that it is a major issue for the currency markets at this stage.
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. 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 earlier this week. Yesterday, we indicated that the short-term picture in USD/JPY had become toppish and we advocated to reinstall USD/JPY short positions for return action lower in the recent trading range. We hold on to that bias.
On Wednesday, there were not key eco data in the UK. However, the swings in global markets and in other major currencies also affected sterling trading. EUR/GBP traded sideways in the 0.9050 area during the morning session in Europe. However, later in the session the (stock market driven) correction on EUR/USD also dragged EUR/GBP lower. Apparently, there was still some unwinding of stale euro long positions to do and this move also hit the euro against sterling. The dropped to the 0.9000 area first and finally broke below the key 0.8984 support area. This triggered additional stop loss selling and the pair reached intraday lows in the 0.8952 area and closed the session at 0.8981, compared to 0.9042 on Tuesday.
Today, the UK calendar contains the Money supply and lending figures. They are interesting from a monetary policy point of view but we don’t expect them to be important for currency trading. So, global factors and even more technical considerations will continue to set the tone for trading in sterling. Yesterday’s move in EUR/GBP was for an important part driven by the global correction in the euro. So, EUR/GBP traders will keep a close eye on whether or not the decline in EUR/USD will continue. The high degree of uncertainty going into the next week BoE meeting contains the risk of ongoing market nervousness and a higher volatility.
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 when considering the economic fundamentals and the BOE’s monetary policy approach. Nevertheless, yesterday’s drop below the key 0.8984 support is a high profile technical warning signal. It at least suggested that the unwinding of sterling over overextend sterling short positions, was not completely worked out. For now we keep a wait and see approach to see how the test of this key support area will work out. However, it is obvious that our ST sterling negative bias is under pressure. If the pair doesn’t return above the 0.9000 mark soon, the correction might go quite a bit further. The 0.8845 area is the next high profile support on the charts.
