On Friday, the focus on currency markets shifted from central bank actions (FED, ECB, BOE) to the US payrolls. This report is still one of the most influential economic data. However, this time it had no lasting impact on currency trading. EUR/USD hovered sideways in the 1.4860/1.4900 area going into to publication of this report. The payrolls came out slightly weaker than expected. The newswires gave a lot of attention to the employment rate moving beyond the 10.0% mark. However, taking into account the upward revisions of the previous months, the report might be considered as close to the market consensus. Initially, markets reacted a bit nervous to the outcome of the report. Stocks nosedived and risk aversion also pushed EUR/USD to the 1.4820 area. However, this pocket of risk aversion was very short-lived and both stocks and EUR/USD soon returned to the levels seen before the publication of the release. The high level of US unemployment only reinforces the market feeling after last week’s Fed meeting that the US central bank will be in no hurry to scale back (monetary) policy stimulation anytime soon. In theory, this is/remains a dollar negative context.
Over the weekend, the Finance Ministers of the G20 gathered in Scotland. The G20 repeated that it is too early to withdraw policy stimulation that has been put in place to support to global economy. On top of that, the G20 developed some kind of timetable/ framework in co-operation with the IMF that should help to address the global imbalances. However, there was no mentioning of any specific action to address the current developments on global currency markets. This suggests that the global context on the currency markets hadn’t really changed. Over the previous months, this global context was a negative for the dollar and supported the euro and other higher yielding currencies. Remarkably, ECB’s Tichet was quoted that ‘on the other side of the Atlantic the same kind of progressive, gradual phasing out of non-conventional measures in a timely and gradual fashion’. We doubt that this will be able to remove the market feeling that the ECB is taking the lead in the process of scaling back nonconventional measures. On China and the yuan, the impression is that China doesn’t feel pressured to change its policy anytime soon. In their view, the weakness of the dollar is in the first place a problem that should be addressed by a credible US policy.
In this context, it should not surprise that EUR/USD is gaining some ground at the start of trading in Asia this morning.
Today, the eco calendar is very thin on both sides of the Atlantic. The 3-year US auction is the most interesting feature on the agenda. However, recently, the short end of the US yield curve was rather well bid. So, we don’t expect this auction to become a key factor of trading on the currency markets. This leaves the global context and the swings on the equity markets as the usual suspects to guide the price action on the currency markets
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 reversing its very stimulating monetary policy. Last week’s policy meetings from the Fed and the ECB only confirmed the underlying dollar negative picture. The FOMC meeting confirmed that the dollar negative, accommodative stance will remain in place for longer. On the other hand, the ECB gave the impression that it might be closer to scale down some of its unconventional measures.
Last week, we indicated that the EUR/USD downward correction had probably run its course. We hold on to that view. The payrolls and the G20 didn’t bring any signal to expect a change in the gradual longstanding EUR/USD uptrend.
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, if any, were very limited, too. 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. The correction bottomed out in the 1.4700 area. Last week, EUR/USD recouped the longstanding uptrend line (1.4780) and the pair clearly closed above this level on Friday, which is a positive. So, the odds are for the EUR/USD currency pair go for a retest of the 1.5063 reaction high.
On Friday, the US payrolls also where the key factor for USD/JPY trading. However, the impact of the report on USD/JPY was a bit different compared to the other USD cross rates. Some investor nervousness/losses on the equity markets after the (slightly) weaker than expect US payrolls report hammered the USD/JPY currency pair. It dropped from the 90.75 area to the 89.65 area. However, while EUR/USD was soon able to recoup the early losses as soon as it appeared that the impact on equities would be limited, such a reversal didn’t occur in USD/JPY. This suggests some underlying yen strength/dollar weakness. USD/JPY closed the session at 89.88, compared to 90.71 on Thursday evening.
This morning, there were no important eco data on the agenda in Japan. Asian stocks trade mostly higher and this gives USD/JPY some downside protection. The pair tries to regain the 90 mark at the moment of writing.
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 to some extent joined the global dollar trend (decline). The long-term trend obviously remains USD/JPY negative. We turned more cautious on USD/JPY shorts on technical considerations as the pair came closer to the 88.00/87.10 range bottom) and we were looking for re-entry opportunities in the 92/93 area, an area reached two weeks ago. We advocated re-installing USD/JPY short positions for return action lower in the trading range. We hold on to our bias.
On Friday, EUR/GBP held the sideways trading pattern that was in place for most of last week. However, the underlying sentiment was still sterling supportive. The UK PPI data had no lasting impact on sterling trading. The pair set an intraday high after the US payrolls report in the 0.8990 area. However, as soon as it become clear that the report would have no negative impact on global investor sentiment, sterling found again a better bid and the pair even dropped to new intraday lows in the 0.8930 and the pair closed the session in that area. So, sterling still managed to avoid any negative impact from Thursday’s BoE decision to extend its QE program by an extra £25 B, while at the same time the ECB indicated that it will phase out extra-ordinary liquidity measures in a timely fashion.
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, debate on additional QE steps was still ongoing, especially after the poor Q3 growth figure released two weeks ago. Nevertheless, the speculation on additional QE didn’t prevent EUR/GBP from dropping below the 0.8984 support. This was an important technical warning. Last week’s BoE decision (surprisingly) not causing any harm for sterling only confirmed the feeling that sterling correction might have some further to go. From a fundamental, long term point of view, we don’t see any reason to turn sterling positive in a context where the BoE is lagging the ECB in scaling down (a much more aggressive) monetary stimulation. However, in a day to day perspective, we can’t ignore the sterling constructive mood. The pair not being able to regain the 0.9000 area after the BoE/ECB decisions last week only reinforces this technical warning signal. A drop below the recent lows in the 0.8910 area would open the way for a retest of the next high profile support coming in at 0.8845.
