On Monday, the reflation story was back. We already attended this kind of market reaction a few times before of late. A similar move occurred on Monday last week. There was not really one specific headline story to explain the flaring up of investor optimism. Nevertheless, the global context of gradually improving eco data and a globally stimulating policy approach is sometimes enough to trigger a broad move higher. Yesterday, the pieces fell again at the right place. Fed’s Bullard (usually seen as a hawk) over the weekend raised the option for the Fed to extend purchase of the mortgage related assets. As such, one Fed member raising this kind of remarks is not enough to change the course of events on global markets. However, it reinforced the view that the most important central bank in the world is still far away from tightening its policy. The liquidity-driven rally could try a new upleg and the dollar, as usual, paid the price. The eco data, European PMI’s and the US existing home sales came out better than expected and helped to support the constructive global market sentiment. The S&P came within striking distance of the year highs and EUR/USD almost touched the 1.50 mark. However, even as stocks and EUR/USD showed decent gains, a real test/break didn’t occur and both stocks and EUR/USD came off from the intraday highs. EUR/USD closed the session at 1.4961, compared to 1.4862 on Friday evening. The US 2-year auction went reasonably well and was again no factor of importance for the currency market. So, the EUR/USD currency pair had a good run yesterday, but the global pictured hasn’t changed.
At the time when EUR/USD reached the intraday highs, some headlines from a speech of Mr. Trichet hit the screens. On the forex markets, he repeated the usual mantra that Bernanke was very clear on the strong dollar and that a strong dollar is good for the international community. However, we don’t think that those headlines were the reason why the rally stalled. The price action on the equity markets probably was a better explanation than Tichet’s comments.
Today, the calendar is well filled. In Europe, the German IFO indicator is scheduled for release. The market is expecting a further improvement. In the US, the second reading of the US Q3 GDP, the consumer confidence the Richmond Fed survey for the manufacturing sector and the CS house prices will be published. After the close of the European markets, the Treasury will auction $42B 5-year Notes and the Fed will publish the Minutes of the November 4 policy meeting. The IFO and the US data, via the reaction on the stock markets, might be of intraday importance for EUR/USD trading. However, they shouldn’t change the broader picture. We take a close look at the Fed Minutes as the were the starting point a new campaign of the Fed to convince markets that the current loose policy will stay in place for an extended period of time. The message should be rather soft and not really USD supportive. Of course, a lot of this might already be discounted at the current levels.
In a day-to-day perspective, the price action on the Asian stock markets this morning is less buoyant compared to the start yesterday morning. So, consolidation (or even some profit taking) on the equity markets probably will cap the upside in EUR/USD.
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 Monday, USD/JPY trading once again didn’t yield an interesting story. Japanese markets were closed for a holiday. So, USD/JPY trading developed in thin trading conditions and was order driven. The constructive price action on global equity markets triggered a few small waves of yen selling. However, the pair basically remained locked in the established sideways trading pattern. After touching intraday lows in the 88.60 area at the start of trading in Europe, the pair revisited Friday’s highs in the 0.8910/20 area, but a break didn’t occur. USD/JPY closed the session at 88.97, compared to 88.88 on Friday evening.
This morning, Asian stock markets failed to extend the positive momentum in the US and Europe yesterday. This is helping the yen to regain yesterday’s minor losses. On the newswires, there is a lot of attention for the quarrelling between the BOJ and the government as politicians are pressuring the BOJ to take more decisive action to stem the mounting threat of deflation. However, at least for now this debate isn’t affecting yen trading.
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 Monday, sterling traders apparently took a breather after the correction at the end of last week. EUR/GBP still reached new highs in the mid 0.900 area early in Asia, but there was no follow through price action. There were no important UK eco data on the calendar and in this context a break of the important 0.9066/78 resistance area was a too high hurdle. So, the pair settled in a tight sideways trading pattern just above the 0.9000 mark. EUR/GBP closed the session at 0.9010, little change from Friday’s close at 0.9006.
Today, the UK calendar contains the Q3 business Investment data. They are expected to show a further decline in investment activity. A sharp deviation from consensus might affect trading in the sterling. During the morning session, several BOE members (including BoE’s King) will testify on the inflation report. After the publication of the Minutes of the Previous BoE meeting, the market was surprised that the BoE considered again lowering the deposit rate on reserves of commercial banks at the BOE. Any hints on this issue might affect currency trading. We expect the BOE to come our rather soft and the keep the door open for all QE options at the February meeting when the next inflation report will be available. However, such moderately soft stance shouldn’t come as a surprise for markets.
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. This pair dropping below the 0.8900 area 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/GBP regained the 0.8900 area and 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 0.9065 reaction high area would make the ST picture again positive. Yesterday, a first attempt to test this area was rejected. We look to reinstall EUR/GBP long exposure in case of return action lower in the 0.8900/0.9065 range.
