On Thursday, global markets didn’t really know which way to go. European stocks didn’t do that bad, but the US stock market indices failed to extend their recent rally and this slowed the ‘coincident’ decline of the US dollar. In EUR/USD technical considerations played a role too. The pair on Wednesday came close to the year highs, but a real test/break didn’t occur. This was enough a reason for some short-term players to scale down EUR/USD longs, especially as the price action on the equity market didn’t provide any fuel to this EUR/USD rally. The pair drifted south throughout most of the session from opening levels in the 1.50 area and dropped below the 1.49 mark towards the end of the European trading hours. In an interview Fed’s Plosser wasn’t really worried about the recent weakness of the dollar as he said that the US currency had yet returned to pre-crisis levels. However, these headlines had no impact on currency trading. Later in US trading stocks slipped deeper into the red and this caused some additional losses in EUR/USD, too. The pair closed the session at 1.4850 compared to 1.4999 on Wednesday evening. To be honest, the correction in EUR/USD was a bit more forceful than what one would expect on the basis of the stock market performance. So, apparently, there was some unwinding of overextended euro long positions to do. At least for now, we don’t draw firm conclusions from yesterday’s, admittedly disappointing price action in this pair. For now we still consider it as a simple correction.
Today, the calendar is more interesting compared to the previous days. In Europe, a first estimate for Q3 growth will be published. In the US, investors look out for the September US trade balance and for the Consumer confidence release from the University of Michigan. Despite the lingering debate on global rebalancing, the FX market recently didn’t give that much attention to US trade figures. The figure probably will have to show a substantial deviation from consensus to trigger a lasting market reaction. The Michigan confidence, via the reaction on the stock markets has probably more market moving potential, at least in an intraday perspective.
Over the next days, currency markets will also take a look at President Obama’s visit to Asia. Especially, its visit to China might yield some interesting headlines. Any indications that China would be prepared, at some point, to allow the yuan to appreciate against the dollar could turn the focus to the Asian region and its currencies. In theory this could ease the upward pressure on the euro against the dollar. However, this is primarily a long term issue. We keep an eye on it, but we would be surprised if this theme would able to challenge the long-standing trading pattern in EUR/USD anytime soon.
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, 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. Corrections in step with the stock markets are still very well possible. Yesterday’s correction might fit in this framework. In a day to day perspective, we feel that the EUR/USD uptrend is losing some momentum. Nevertheless, we don’t see any hard factor yet to change our long standing dollar negative view.
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 a 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 MT picture euro supportive. Even after yesterday’s correction, this picture hasn’t changed (our longstanding uptrend line in the 1.4815 area is still in place). Nevertheless, Wednesday’s rejected test of the highs and the subsequent correction suggest some unwinding of stale longs. So, while staying EUR/USD positive longer-term, we tend to turn a bit more cautions in a dayto day perspective.
On Thursday, USD/JPY joined the global dollar rebound. The pair drifted sideways just below the 90 mark in Europe and early in European trading, but spiked higher as soon US traders joined the action. This might look a bit strange as this yen decline coincided with a loss of momentum on the equity markets. Recently we had the impression the yen was still favoured at times when risk appetite declined. Yesterday’s price action obviously doesn’t fit into that trading pattern. In our view, it only confirms that there is not really a strong market theme/story to guide the price action in this pair. Technical considerations continue to dominate the price action. USD/JPY closed the session at 90.37, compared to 89.87 on Wednesday evening.
This morning, Japanese eco data (IP, consumer confidence) were close to expectation and as usual had not impact on markets. Asian stocks are mixed. So, there were no strong follow-through losses on yesterday’s correction in the US. At the moment of writing, USD/JPY is little changed compared to yesterday’s closing levels.
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. At that point, we advocated reinstalling 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. The 89.30/10 area apparently is a hard nut to crack.
On Thursday, there were no eco data on the agenda in the UK. Nevertheless, sterling posted quite a strong performance. EUR/GBP declined throughout the whole trading session. There was no big headline story to explain the move, but sterling managed to recoup Wednesday’s losses against the euro. So, negative headlines from the inflation report were dismissed rather quickly. The move might partly mirror the some global euro correction (in step with the correction in EUR/USD), but it also suggests that the recent unwinding of sterling shorts isn’t completely worked out yet. EUR/GBP closed the session at 0.8957, compared to 0.9041 on Wednesday evening.
Today, UK calendar is again empty. So, technical considerations will continue to guide the price action in the sterling cross rates.
Global context: Since early August, sterling sentiment deteriorated again as then BoE raised the asset purchase program to £175B. On top of that, BoE’s King at that time already called for an even greater effort, indicating 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 and October meetings, the BoE took no additional policy steps. However, the debate on additional QE steps was still ongoing, especially after the poor Q3 growth figure. Nevertheless, 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 short-term 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. Wednesday’s reaction on the BoE inflation report reinforced this feeling and made us reinstall a buy-on- dips approach. Yesterday’s price action of course is very disappointing from our EUR/GBP buy-on-dips call. The 0.8900 area is the short-term line in the sand (Stop-loss). A break below this level would be a strong warning that the GBP correction/rebound has some further to go. A sustained break above the 0.9061/65 reaction high area is still needed to turn the ST picture again positive and open the way for return action to the 0.9240 resistance area.
