On Friday, there were quite a series of interesting eco data scheduled for release. However, the immediate impact on markets in general and on currency trading in particular, was rather limited. Stocks traded sideways in Europe and EUR/USD joined this pattern. The European economy left the recession behind in Q3 as data showed a 0.4%M Q/Q growth. However, this (slightly weaker than expected) figure failed to inspire markets. Stocks came under some pressure early in US trading. The trade balance came out more negative than expected, but this release initially had no additional negative impact on the dollar, but the weaker than expected Michigan consumer confidence release reinforced the move. Stocks and EUR/USD set an intraday low at the time of the publication of the report. EUR/USD tested bids in the 1.4825 area, coming again rather close to the MT uptrend line. However, there was once again no follow through price action on this disappointing consumer confidence release. Stocks soon recouped the earlier losses. We didn’t see a big story behind this rebound. EUR/USD rebounded above the 1.4900 area and closed the session at 1.4903, compared to 1.4850 on Thursday.
Today investors in Europe will look out for the October (core) CPI release. In the US, the retail sales, the Empire manufacturing survey and the Business inventories are scheduled for release. In particular, the retail sales will have market moving potential. In the (recent) past, the reaction on the stock markets and on currency markets was almost always determined by the swings in risk appetite. In this context, good news was good for the euro and bad for the dollar. We don’t feel the need to predict a change in this pattern today. However, if we would get more signs that the economic rebound in the US is becoming materially more forceful compared to the euro zone (Q3 growth in Europe was below the US growth pace), this could over time change the market perception. Interesting to see whether we would already see some tentative signs of such a change in case of a (much) better then expected US retail sales release. To be clear, for now this way of thinking, is nothing more than an hypothesis that needs confirmation by several sets of eco data. Later today, markets will also keep a close eye on the speech of Mr. Bernanke on the economy. We don’t expect a clear change in approach compared to the message from the lasted Fed meeting.
Of course, the headlines on al markets today will be on Obama’s visit to China. In the run-up to this visit, there was some speculation that China was coming closer to the point where it would allow the yuan to appreciate against the dollar. However, at least for now to comments from Chinese officials don’t make any opening in that direction yet. A reference to the currency markets was also left from a statement of the APEC meeting this weekend, suggesting ongoing discord between the US and China in this issue. So, any hope that a rise of the yuan (and of other currencies in the region) would take away the pressure from the euro, apparently is premature. On top of that, APEC leaders pledged to maintain stimulus measures to support the economic rebound. This is supporting risk taking in Asia this morning. In this context, EUR/USD is resuming its uptrend in Asia this morning.
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. 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.
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. At the end of last week, there was again a moderate correction, but once again, the global picture didn’t change (our longstanding uptrend line in the 1.4815 area is still in place). The strong start on Asia suggests that a retest of the highs in EUR/USD is still possible. However, in line with the price action over the previous months, we don’t expect an acceleration of the EUR/USD uptrend in case of such test (or even in case of a break). The trend is up, but remains very much gradual.
On Friday, USD/JPY drifted again south, unwinding a rather ‘strange’ rebound on Thursday evening. A lack of momentum on the stock markets at the start of trading in Europe and early in the US apparently was already enough for technically inspired traders to scale down yen short exposure. President Obama’s visit to Asia might have played a role, too. Speculation that this visit might facilitate a more flexible yuan regime might have made short-term players reluctant to hold short positions in Asian currencies, including the yen. So, despite the stock market rebound later in US trading, USD/JPY closed the session at 89.66, compared to 90.37 on Thursday.
This morning, Japanese Q3 GDP data came out much better than expected at 1.2%, (compared to 0.7% growth in the second quarter). However, the release fails to trigger an euphoric reaction on the Japanese markets as investors continue to worry on the Japanese economic outlook going into 2010 as the government has little room to take additional steps to support the economy. The Nikkei is underperforming the rebound in other Asian stock markets. USD/JPY is holding close to Friday’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 Friday, there were again no eco data on the agenda in the UK. So, technical considerations continued to rule the price action in the EUR/GBP currency pair. Early in the session, sterling continued Thursday’s remarkable rebound against the single currency and around noon the pair was traded in the low 0.89 area. So, the key 0.8897 support came again in the picture. However, a real test of this level didn’t occur and the pair settled into a rather tight sideways range just above the intraday highs going into the end of the trading week. EUR/GBP closed the session at 0.8937, compared to 0.8957 on Thursday.
This morning, the Rightmove house prices came out at -1.6% M/M (1.6% Y/Y). The M/M decline is in line with a traditional year end seasonal slowdown, Rightmove said. EUR/GBP is being traded a few ticks higher after the publication of the release. Later today, the UK eco calendar is again empty. So, the technicals will again set the tone for trading in this pair.
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. The November BoE decision to raise the amount of asset purchases (surprisingly) didn’t any harm for sterling and 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. Over the previous two weeks, the pair extensively retested the 0.8900 support area. A sustained break didn’t occur, but the pair failed to move away from this area, even incase of sterling negative headlines. For now, we hold on to our ST buy-on-dips approach in this pair, but keep tight stop-loss protection to defend a break below the key 0.8897 support. 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.
