Next report should be on Thursday 12 November, 2009
On Monday, markets took quite a spectacular start to the new trading week and EUR/USD joined this broader move as the currency pair regained temporary the 1.50 barrier. Recently, the news flow continued to be dollar negative while riskier assets received again a better bid. This is still enough a reason to push EUR/USD higher.
At last week’s meeting, the Fed reiterated to keep rates exceptionally low for a prolonged period. The US employment rate rising above 10% as shown in the labour market report on Friday, only reinforced the case for the Fed policy approach. In a context of good risk appetite, this remains a good excuse to use dollar as funding currency in setting up carry trades. On the other hand, the ECB gave some tentative signs that it was more inclined to scale down unconventional policy measures than is the case of the Fed and the BoE. The message from this weekend’s G20 meeting was not really USD supportive either. The meeting failed to give any signal that the global community was preparing any action to address the weakness of the US currency. The IMF even indicated that the dollar remained on the strong side against its equilibrium value. In the same context, the Fund said that the euro is also on the strong side of its equilibrium. However, in the current environment, Europe is seen as having no hard means to address this ‘problem’. So, the IMF’s assessment on the euro didn’t impress the currency markets. On top of that, world economic leaders pledging that it is too early to withdraw policy stimulation incited investors to taken more risky assets on board. This cocktail of dollar negative fundamentals and a return of global risk appetite yesterday gave EUR/USD a shot in the arm. The pair opened in the 1.4900 area at the start of trading in Asia and gradually moved higher to test offers in the 1.50 area around noon. The rally slowed early in US trading. However, the EUR/USD currency pair easy preserved most of the earlier gains and closed the session at 1.4999 compared to 1.4847 on Friday evening. Once again there were some complaints from the European corporate sector (BusinessEurope) that the strength of the euro against the dollar is reaching a pain threshold for the industry in Europe. However, this calls hardly had any impact on currency trading.
Today, the US data calendar is again thin. In Europe markets will look out for the ZEW economic sentiment and French and Italian production data. Usually, those data have only limited impact on currency trading. After the close of the Europe, the Treasury will auction $ 25B of 10 –year bonds. Recently, US bond auctions (especially the shorter maturities) went very smooth and were absolutely no issue for the currency market. However, after last week’s Fed decision, we still keep an eye on the first auction of bond with a longer maturity. Last but not least, there is a very long list of Fed speakers that will address a width range subjects.
Overnight, there is some limited profit taking on yesterday’s EUR/USD rally. However, the bid still looks well in place.
Global context. Already for quite some time, 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 scaling down some of its unconventional measures. The swings in risk appetite/risk aversion might accelerate/slow the decline of the dollar against the euro. However, at least for now the trend remains very well in place. 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 longstanding EUR/USD uptrend. Corrections in step with the stock markets are still very well possible, but as long as the global framework doesn’t change, the should remain limited. Regarding this global framework, President Obama’s visit to China next week is the next high profile event to look out for.
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. The subsequent 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 Monday, trading in USD/JPY was an area of relative calm compared to the rather sharp moves seen in a lot of other markets. The pair basically kept a sideways trading pattern between 89.70 and 90.25. The return of risk on global markets was not able to give trading in this pair a clear direction. So, technical considerations and spill-over effects from other cross rates were again the drives for USD/JPY trading. The pair closed the session at 89.93, little changed from 89.88 close on Friday evening.
This morning, the Japanese eco calendar was well filled. However, the current account and the lending/money supply data were too close to expectations to spark a market reaction. Some more attention went to a Fitch report indicating that it might have to review its AA-rating on Japanese government bonds if there were a material increase in debt issuance above the current JPY 44 trillion next fiscal year. However, contrary to what happened with sterling, the damage for the yen was close to nonexistent. USD/JPY even dipped a few ticks lower (probably due to unwinding of sterling long positions) immediately after the Fitch announcement. Asian stocks are in positive territory this morning, but the gains are far form spectacular when compared to yesterday’s equity performance in the US and Europe.
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 Monday, trading in the EUR/GBP currency pair showed some intraday volatility, but after all the pair closed the session little changed from at the end of last week. Sterling was still well bid early in the session. EUR/GBP dropped to the 0.8900 support area. However a real break didn’t occur and the pair gradually changed course. Kraft leaving its bid for Cadbury unchanged might have played a role too. Recently, front-running on this deal was often mentioned as a factor behind recent sterling strength. The bidding process might not be over yet, but yesterday’s ‘non-sweetened’ bid from Kraft might have caused some short-term sterling longs to throw the towel. So, despite an ongoing positive sentiment towards riskier assets, sterling gradually had to give up the early gains against the euro. EUR/GBP even closed the session slightly higher at 0.8949, compared to 0.8938 on Friday evening.
Overnight, there were already quite some interesting headlines on the UK. The RICS house price balance and BRC retail sales monitor came out strong/better than expected. However, this news failed to support the UK currency. Even more, Fitch in a report said that the UK is at most risk of losing its AAA status among major economies. This report sent sterling sharply lower against the euro and the dollar. EUR/GBP was even temporary traded above the 0.9000 mark. Nevertheless, Fitch still maintains a stable outlook of the UK AAA credit rating.
Later today, the UK trade balance data are scheduled for release. However, we expect the Fitch headlines to remain in the market focus today.
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. A sterling short-squeeze kicked in since mid October, even as speculation on additional QE continued. EUR/GBP even dropped below the 0.8984 support. This was an important technical warning. Last week’s BoE decision (surprisingly) not causing any harm for sterling only reinforced the feeling that the sterling correction might have some further to go. From a fundamental, long term point of view, we didn’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 shortterm perspective, we could ignore the sterling constructive mood/technical picture. Yesterday, the pair retested the 0.8900 support area, but a sustained break didn’t occur. We don’t cry victory yet, but this might be a first indication that the sterling rebound is losing momentum. The pair needs to regain the 0.9000/61 area in a sustainable way to call of the downward alert. Nevertheless, we have the impression that the downward pressure in this pair is abating.
