On Friday, the eco calendar was empty on both sides of the Atlantic. So, stocks were again the key factor for trading on other markets. European stock markets faced some headwinds. We didn’t see one obvious factor to explain investor worries, but on the screens of the financial newswires, there was a lot of talk about a potential default of Ukraine. This speculation was not really a new, but it might have added to investor uncertainty. Stocks and EUR/USD dipped to intraday lows, EUR/USD neared 1.48 mark, just before the open of the US markets. However, the euro again found its composure soon. US stocks opened also in negative territory, but the losses remained limited and this gave EUR/USD downside protection. ECB president Trichet in a speech indicated that the ECB will gradually unwind exceptional liquidity measures and the ECB, via its website announced some stricter rules on collateral for its repo’s in the future. However, this ECB news had hardly any impact on currency trading. US equities recouped part of the earlier losses late in the session and this helped EUR/USD to close the session, off the intra-day lows, at 1.4862, compared to 1.4925 on Thursday.
Over the weekend, there were some headlines from Fed’s Bullard on the dollar. He indicated that the dollar’s appreciation at the height of the financial crisis showed that markets still view the dollar as the safe haven and the world’s main reserve currency. He said the US didn’t want to lose this status. Nevertheless, Bullard, a hawk, surprisingly advocated keeping the MBS purchase program open beyond Q1 2010. In a broader perspective, the ECB (cf. speech Trichet) signals its intention to scale down the exceptional crisis measures sooner than is the case for the very offensive monetary approach of the likes of the Fed and the BOE as they openly indicated they wanted to support the asset markets recently.
Today, the calendar contains the advance reading of the euro-zone PMI’s for the month of November. The market consensus expects a gradual improvement of business sentiment. In the US, the existing home sales are on the agenda. Recently, some indicators from the housing market US disappointed. However, most often the damage for global market was rather limited. After the close of the European hours, the US Treasury will auction 45.0 bln of 2-year notes. It will be interesting to see the market’s appetite for the notes at the current low yield level. However, we don’t expect a big impact of the auction on the currency market, even in case it would go less smooth compared to the previous very successful action (cf. Bond part supra).
So, once again, one might expect global investor sentiment to set the tone for EUR/USD. In this respect, sentiment wasn’t that bad in Asia this morning. This constructive sentiment helped EU/RUSD to regain 1.4900 mark this morning. However, in a broader perspective, EUR/USD is still in the sideways, consolidation pattern where it already was over the previous 10 days. To be honest, we would be a bit surprised to see EUR/USD move out of this pattern today.
Global context. Already for quite some time, the swings in risk appetite/risk aversion are the main driver for the price action 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. So, until further notice, we maintain our assumption that the uptrend in EUR/USD remains in place, even as the pace is slowing. For now, the downside in EUR/USD remains rather well protected.
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 the momentum of the uptrend is waning. 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 Friday, trading in the USD/JPY cross rate developed in a very lackluster environment and was confined to a tight sideways trading pattern roughly between 88.70 and 89.10. The pair touched intraday lows at the start of trading in Europe and regained some ground later in the session. So, the yen this time was not able to take any advantage from the correction that was seen mostly on the European stock market. The pair closed the session little changed at 88.88, compared to 88.97 on Thursday.
This morning, Japanese markets are closed. Most Asian markets are higher. Commodities, including gold took again a positive start to the week. At least for now, the impact on yen trading is close to non-existent.
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 Friday, EUR/GBP extended the rebound that started after the publication of the minutes of the last BoE meeting on Wednesday. Worries on the mounting UK budget (poor UK monthly deficit figures were published on Thursday) might have added to the GBP negative sentiment. On Friday, aversion to risk might have weighed on sterling, too. Especially during the morning session in Europe sterling continued to cede ground against the euro. Later in the US, global sentiment turned less negative and the decline of sterling slowed, too. EUR/GBP closed the session at 0.9006, compared to 0.8954.
Today, the UK calendar is again empty. Nevertheless, sterling continues to lose ground against the euro this morning. We didn’t see much reaction on Trichet’s speech on Friday. Nevertheless, as is the case for EUR/USD, the ECB’s stricter policy approach compared to the BOE is no help for sterling against the euro.
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 kept a dovish tone, 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. 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 shortterm perspective, we couldn’t ignore the sterling constructive mood/technical picture. The pair early last week dropped below the 0.8900 support area. This was an additional warning signal. However, sentiment changed again after the publication of the minutes of the November policy meeting as the BoE discussed the possibility of cutting the despite rate. EUR/USD regained the 0.8900 area is now well above the MTMA (today at 0.8855). So, the downside alert in EUR/GBP has been call off. A break above the 0.9061/65 reaction high area would make the ST picture again positive. We look to reinstall EUR/GBP long exposure in case of return action lower in the 0.8900/0.9065 range.
