On Wednesday, trading in most markets, including in EUR/USD, was mostly driven by technical considerations. There were no important eco data on the agenda in the US. In several markets trading volumes were light as a lot of investors enjoyed a holiday on November 11 (Veteran’s day). So, markets had to build on the trading themes that were already in place earlier this week. In a global context, investors still took comfort from the message from last week’s central bank policy decisions and from the G20 meeting. Policy stimulation will be maintained in the foreseeable future and this continues to support global risk appetite, which weighted on the dollar and is supporting higher yielding currencies and the euro, especially as the ECB looks more inclined to scale down extra-ordinary measures compared to the Fed and the BoE. Stocks took again a positive start in Europe and this pushed EUR/USD well above to the 1.50 mark. The pair even came within striking distance of the October highs. However, a real attempt to break higher didn’t occur and the pair even erased the earlier gains at the end of the European trading session. The move was again very much inspired by what happened on the equity markets. The S&P set a new intraday high early in US trading, but as there was no follow through action on this move, this also blocked the topside in EUR/USD and the pair returned the opening levels. EUR/USD closed the session at 1.4987, compared to 1.4993 on Tuesday evening.
Yesterday, the People’s Bank of China in a report hinted that it might consider returning to a peg of the yuan to a currency basket, rather than keeping it more or less stable against the dollar. As usually, any message from China on this kind of items is very guarded and subject to interpretation. It is probably no coincidence that this signal has been given only a few days before a visit of President Obama to Asia and China. Nevertheless, as is usually the case in China, a policy shift (if any) will be very gradual. So, at least for now this hint had no obvious impact on the short-term trading paradigm on global currency markets. USD traders continue to play the risk appetite theme.
Today, the calendar is moderately interesting. The EMU September production data are interesting, but no market mover. In the US the weekly jobless claims might have some intra-day impact on trading. However, the global context and the performance of the equity markets will continue to guide the price action the currency markets, including the moves in EUR/USD. The long-standing trend is obvious, but with Asian stocks (except for China) and US stock market futures slightly in negative territory this morning, there might not be a strong enough trigger available for a forceful/ successful attack on the 1.5063 highs already.
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, they 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. Such correction occurred at the end of last month, but it bottomed out in the 1.4700 area. The pair tested the longstanding uptrend line since March, but a break didn’t occur. This keeps the ST picture euro supportive. So, the odds are for the EUR/USD currency pair go for a retest of the 1.5063 reaction high. The move might even go beyond this level. However, earlier this year, the pair breaking to new highs most often hardly triggered any acceleration of the uptrend. We expect this pattern to continue.
On Wednesday, trading in USD/JPY again showed quite an uneventful trading session. In thin markets, the pair was under slight pressure in Asia. However, the 89.20 support (last week low) was even not really tested. With risk appetite in global markets holding up rather well, the upside in the yen was limited and the pair soon returned to the Tuesday closing levels. USD/JPY held a tight sideways trading range in the 89.75/90.00 area during the European and US trading session.
This morning, the decline in Japanese wholesale price slowed from -8.0% to -6.7%. However, with prices still declining 0.7% on the month, the deflation theme is still far from over yet. The Nikkei closed the day with a loss of 0.7%. However, the impact on USD/JPY trading is very limited with the pair holding just below the 90 mark.
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, even as we have to admit that the pair showed no strong directional momentum.
On Wednesday, the focus in the UK markets was on the inflation report. The BoE still expects inflation to remain below the 2% level in the policy relevant horizon. On top of that, BoE’s King indicated that the Bank has an open mind on additional QE steps. The issue will be decided at in February when the next Inflation report is available. However, the end of QE has not been decided yet. The BoE Governor also repeated the well-known view that a weak pond would help the UK economy to rebalance towards export. The prospect of an ongoing stimulating monetary policy and UK policy makers showing quite happy with the current weakness of sterling triggered a new sterling selling wave. EUR/GBP jumped beyond the 0.90 mark. The pair closed the session at 0.9042, compared to 0.8954 on Tuesday evening. The UK labour market data came out slightly better than expected, but this was not able to counterbalance the message from the BoE.
Today, UK calendar is empty.
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 couldn’t ignore the sterling constructive mood/technical picture. Early this week, the pair retested the 0.8900 support area, but a sustained break didn’t occur. On Tuesday, we indicated that this could have been a first indication that the sterling rebound is losing momentum. Yesterday’s reaction on the BoE inflation report reinforced this feeling. The pair needs to regain the 0.9000/61 area in a sustainable to call off the downward alert. Nevertheless, we have the impression that the downward in this pair has become much better protected. We re-install a buy-ondips approach. A sustained break above the 0.9061 reaction high would open the way for a return action to the 0.9240 resistance area.
