On Monday, the EUR/USD currency pair made some cautious gains. However, given the buoyant price action in most other (asset) markets, the performance of the single currency should be considered as slightly disappointing. Indeed, after some initial gains in Asia, EUR/USD basically held a sideways trading pattern in the upper half of the 1.49 big figure during the morning session in Europe and early in US trading. So, the cross rate hardly profited from the strong gains on the equity markets, even as the S&P managed to break toward new highs for the year. The US eco data (retail sales and Empire manufacturing survey) were mixed and had no lasting impact on trading. In a speech after the close of the European markets, Fed chairman Bernanke confirmed the recent line of the Fed that it will keep rates at an exceptionally low level for an extended period of time. Interesting, Bernanke also made some comments on the dollar. He said the Fed will be attentive to the implications of changes in the value of the dollar. However, as usual the Fed President framed this call within the dual mandate of the Fed to foster both maximum employment and price stability. The value of the dollar was causing some prices rises, but he indicated that other factors (slack in the economy) are keeping price pressures under control. The dollar spiked temporary higher immediately after the Bernanke headlines on the dollar. However, as the broader message from the Fed President was to maintain the ultra-accommodative policy in place, the USD rebound was soon undone and EUR/USD returned even temporary above the 1.50 mark. However, this move could again not be maintained (despite a strong stock market performance). EUR/USD closed the session at 1.4970, compared to 1.4903 on Friday evening.
At least for now, the visit of President Obama to Asia/China didn’t bring a big new insight for currency trading. China is still showing reluctant to re-allow a gradual rise of the yuan anytime soon. So, no big change from this side either. IMF Strauss-Khan advocated that a stronger yuan should be part of a policy mix to ease global imbalances. However he also indicated that he expected the US dollar to remain the most important international currency, at least over the next ten years. As usual, these kinds of headlines had no impact on short term price moves.
Today, the calendar is again well-filled. The European trade balance figures are no market mover. However, in the US, the calendar is more interesting with the producer prices, the TIC data, the industrial production and NAHB housing market index. On top of that, there is again a very long list of ECB and Fed members who will speak at several occasions. However, especially for the Fed, quite some heavyweights gave recently their view on the Fed approach going forward. As usual, currency traders will keep a close eye on the equity markets. It will be interesting to see whether the S&P will be able to confirm its break higher. Looking at yesterday’s price action, EUR/USD failed to get any big support from the stock market rally. We don’t draw any LT conclusion yet, but we feel some fatigue in the euro rally.
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. Recently, several key Fed members, including Bernanke, obviously refrained from giving such a signal. The swings in risk appetite/risk aversion might accelerate/slow the decline of the dollar against the euro. This theme of risk appetite/aversion at some point will stop playing its role as a guide for currency trading in general and EUR/USD in particular. This point is probably coming closer. However, at least for now we don’t see a new trading theme yet that will be able to take over anytime soon. So, until further notice, we maintain our assumption that the trend remains 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. The pair tested several times 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. So, we maintain a cautious buy on dips approach. A correction below the 1.4867/22 area (uptrend line/ reaction low) would be an indication of a ST loss of momentum.
On Monday, USD/JPY was initially locked in a very tight, uninspiring sideways trading pattern between 89.25 and 89.75. The positive sentiment on the stock markets was not able to guide trading in this pair and the same was true for a set of mixed US eco data. The pair continued to trade close to the recent range bottom, but no real test occurred. However, the stalemate was unlocked as soon as the headlines of the speech of Fed’s Bernanke hit the screens. As was the case in several other USD cross rates, the dollar tried to gain some ground first, but the Fed committed to maintain an ultra-accommodative policy prevented any sustained gains. USD/JPY even dropped below the intraday range bottom. The pair closed the session at 89.05, compared to 89.66 on Friday evening.
This morning, the Japanese tertiary industry for September came out much weaker than expected (-0.5% M/M). Supportive comments for global assets markets from Fed’s Kohn failed to inspire Asian stock markets this morning. This is keeping the yen well bid. In the news wires there is still a lot of debate on the difficult balance the Japanese government should strike between stimulating the economy via and extra stimulus on the one hand and keeping the budget deficit/debt issuance under control on the other hand. However, at least for now those worries in the Fiscal situation are not yet a big item for the yen.
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 end October. At that point, we advocated re-installing USD/JPY short positions for return action lower in the trading range. We hold on to our bias. Yesterday’s drop below the 0.8910 support area opens the way for return action to the 0.8810 reaction low.
On Monday, at the start of trading in Europe, it looked as if last week’s rebound of sterling against the euro had run its course. The Rightmove house prices were (-1.6 %, +1.6% Y/Y) were not good enough to provide the sterling rebound with additional fuel. On the contrary, sterling fell prey to some profit taking and EUR/GBP rebound to 0.8980 area during the morning session in Europe. However, once again the UK currency showed decent resilience. In technically inspired trading, EUR/GBP had to return to early gains already during the European trading hours. However, after European traders had left their desks, the speech of Mr. Bernanke also had its impact on sterling trading. In the subsequent market reaction, cable outperformed again EUR/USD and this pulled the trigger from EUR/GBP to drop below the key 0.8897 support. The pair closed the session at 0.8901, compared to 0.8937 on Friday evening.
Today the calendar contains the UK CPI. A small rise is expected. However, after the BoE assessment on inflation last week, one shouldn’t expect a sharp reaction on the currency market. Nevertheless, in the current sterling positive atmosphere we would be surprised to see the UK currency gaining some further ground in case of a higher than expected figure.
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. The pair failed to move away from this area, even in case of sterling negative headlines and yesterday a break below our 0.8897 stop loss area occurred. We keep sidelined for now. The 0.8830 break-up area is the next high profile support on the charts. This is a strong warning that the GBP correction/ rebound has some further to go. A sustained rebound above the MTMA is needed to call of the ST alert. A break above the 0.9061/65 reaction high area is still needed to turn the ST picture again positive.
