After two days of a slightly disappointing price action (especially compared to the global stock market performance), EUR/USD found again its composure on Wednesday. At first there was not really a big story behind the euro rebound. A positive start on the European equity markets might have been a good reason, although the link was not as tight as on Monday and Tuesday. The move even accelerated after the publication of the BoE minutes (cross currency impact from EUR/GBP?). Weaker than expected US housing data caused a temporary setback in risk appetite. A bit later in US trading, markets were again disturbed by the headlines from the speech of Fed’s Bullard. He said that if the Fed waited with raising interest rates as long as it did in previous recessions, it would mean that the Bank would have to wait until 2012. This ‘2012’ mark popping up on the screens temporary hammered the dollar. However, a more in depth reading of the speech made clear that he didn’t at all intend to say that the Fed will wait that long the Fed might have to act earlier this time in order not repeat previous ‘mistakes’. So, the EUR/USD rebound shifted into a lower gear. Nevertheless, this time the pair held up very well, especially taking into account the hesitant price action on the equity markets. Had the currency market still some USD repositioning to do on the back of the recent very soft comments from the Fed? EUR/USD closed the session at 1.4963 compared to 1.4876 on Tuesday evening.
Today, the calendar in Europe is thin. Nevertheless, we take a close look at the speeches of Mr. Trichet and ECB’s Gonzalez-Paramo. Today, there is a nonmonetary policy meeting of the ECB. The “exit strategy” will most likely be on the agenda. So, in this context it is interesting to see whether Trichet or Gonzalez- Paramo will have any new insights on this issue. In the US, markets will look out for the initial jobless claims, the leading indicators and the Philly Fed survey. Especially the claims deserve some attention with US policy makers giving much weight to the situation on the labour market in their monetary policy framework. As usual, we keep a close eye on the stock market reaction. It will be interesting to see whether stocks will be able to build out gains beyond the key technical areas that are under test. If they fail to do so, this lower risk appetite might slow/cap the ascent the euro, too.
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 opposite was the case. 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, even as the pace is slowing. Yesterday’s price action in EUR/USD was constructive. However, from a technical point, the global picture hasn’t changed.
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 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. So, the ST picture remains euro constructive, even as we feel that the momentum of the uptrend is waning. Yesterday’s price action in EUR/USD was positive, but from a technical point, the global picture hasn’t changed. So, we still wouldn’t be surprised to see EUR/USD shifting into a sideways trading pattern going into the end of the year. The 1.4626 reaction low marks a high profile MT support. The recent highs in the 1.5063 area might be the top of this pattern.
On Wednesday, USD/JPY was still locked in a relatively tight sideways trading range in the lower half of the 89 big figure. There was again no big story to guide the price action. Technical considerations and cross currency price action dominated the course of events. Even the headlines from Fed Bullard had hardly any impact on USD/JPY trading. The pair closed the session at 0.8932, little changed from the 0.8925 close on Tuesday.
This morning, Asian stock markets show again a mixed picture. As was already the case over the previous session, the Japanese indices continue to underperform the region. The Nikkei and the Topix have now dropped below important support levels. At least for now, less appetite for risk is supporting the yen. USD/JPY returned below the 89.00 mark this morning. However, as mentioned several times recently, the link between risk appetite/risk aversion and the yen has become far less tight compared to what it was a few months ago.
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. Recent price action suggests that a break below this range bottom will be difficult, too. So, profit taking on shorts in case of the return action to the low 88.00 area might be considered.
On Wednesday, The Minutes of the previous BOE meeting was the key factor for sterling trading. The BoE delivered a split vote (7-1-1) to raise the amount of asset purchases. The fact that one member voted to leave the amount unchanged might have been an indication that the Bank was coming closer the end of its asset purchase program. However, the market focused on another element. The BoE again discussed the option to lower the discount rate on commercial bank reserves. This debate on the discount rate triggered quite a sharp sell-off of sterling. On top of that, the euro was well bid too yesterday. So, EUR/GBP rebounded above the 0.8900 mark and closed the session within striking distance of the highs at 0.8933, compared to 0.8849 on Tuesday evening. During the day, the CBI industrial trends came out better than expected, but it was completely ignored by the currency market.
Today, the UK calendar contains the Retail sales, the Money supply data and the monthly budget data. Recently, various indicators on retail sales often gave a mixed picture. After yesterday’s sterling sell-off on the back of the Minutes, the market reaction will be interesting. In particular, we are keen to see the market reaction in case of a strong figure. Will sterling be able to resume its recent rebound in such a scenario?
Global context: Since early August, sterling sentiment deteriorated again as the BoE raised the asset purchase program to £175B. On top of that, BoE’s King at that time 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. 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 further to go. From a fundamental long term point of view, we don’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 cannot ignore the sterling constructive mood/technical picture. The pair extensively retested the 0.8900 support area and on Monday the pair dropped below our 0.8897 stop loss area. This was an additional warning signal. Yesterday’s rebound was constructive. Nevertheless, we want confirmation over the next days whether the sterling rebound has run its course. A sustained rebound above the MTMA (today at 0.8945) is needed to call off the ST alert. A break above the 0.9061/65 reaction high area is still needed to turn the ST picture again positive. We stay sidelined for now.
