On Tuesday, trading in EUR/USD showed two different faces. In Asia and at the start of trading in Europe, the single currency was under pressure. Asian stocks were in the red. Negative rumours/news headlines on the European banking sector might have played a role. EUR/USD touched intraday lows in the 1.4890 area early in Europe. However, once again this kind correction soon met a decent bid. There were market rumours on a strong IFO figure and the losses on the European stock markets were limited. The IFO coming out on the stronger side of expectations supported the sentiment to risk. Both stocks and EUR/USD extended their rebound. To be honest, the better than expected IFO probably was more of a good excuse confirming the constructive underlying sentiment to the single currency rather than the trigger for the rebound. The US data (GDP and CS house prices in line/ Richmond Fed weaker/ Consumer confidence better than expected) were mixed and had no lasting impact on trading. After the European close, markets watched out for the 5- year auction in the US and for the Minutes of the 4 November FOMC meeting. The 5-year bond sale went again very successful and pushed US bond yields lower. We didn’t see a reaction in EUR/USD. The Minutes showed that the Fed members had become slightly more positive on 2010 growth. The Fed also mentioned the risk of some potential side effects from the maintenance of very low interest rates, including the possibility that such a policy stance could lead to excessive risk taking in financial markets or an unanchoring of inflation expectations. However, especially with respect to inflation the Fed apparently is not yet concerned that it will be a problem anytime soon. The Minutes also addressed the problem of the weak dollar: ‘Any tendency for the dollar depreciation to intensify or put significant upward pressure on inflation would bear close watching’. However, current dollar weakness is in the first place considered an unwinding of safe haven flows. So, the market impression still is that the decline of the dollar is developing at a pace that is not problem for the Fed yet. It reinforced the feeling that the US calls for a strong US dollar doesn’t mean at all that the US is looking for a stronger dollar. EUR/USD held close to the intraday highs after the publication of the Minutes. The pair closed the session at 1.4968, little changed from the 1.4961 close on Monday evening.
Today, the calendar is again well-filled especially in the US with the income and spending data, the Durable orders and the initial claims, the final Michigan consumer confidence and the New home sales on the agenda. These data probably will continue to affect EUR/USD trading via the reaction on the stock market. Nevertheless, we have the impression that the downside in EUR/USD has become better protected again. Last week’s hints from the ECB that its is preparing steps to scale back the unconventional policy measures while the Fed is maintaining its extended period of time mantra probably helped to put a floor for the euro even as stock market rally is losing momentum. Asian stocks are slightly higher this morning and this is keeping a decent EUR/USD bid in place. If this trend would be extended in Europe, year highs in the 1.5064 area might come within striking distance.
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. Even in case this range top would come under pressure, we don’t expect the trend to accelerate. A break will probably continue to develop in a very gradual way.
On Tuesday, USD/JPY drifted south throughout most of the session. In Asia, the move was driven by a rather poor performance of the Asian stock markets. However, the move was extended later in the session even as European stock markets entered a more sideways trading pattern. So, underlying dollar weakness this time was the name of the game. The pair set an intraday low in the 0.8836 area after the publication of the US GDP revision and then settled in a sideways range going into the close. The pair closed the session at 88.50 compared to 88.97 on Monday evening.
This morning, Asian stock markets are mostly in positive territory. Japanese trade balance data came out better than expected, with exports rising for the third consecutive month. Nevertheless, despite better sentiment to risk, the USD/JPY pair is still holding close to the recent lows. So, underlying dollar weakness is still name of the game.
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, 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. Recently, indicated that a break of the key 0.8800/0.8710 support area might be a difficult. The day-to-day momentum obviously had become again more USD/JPY negative. Nevertheless, one might expect renewed verbal interventions from Japanese policy makers in case of a break toward the 0.8710 year low. One shouldn’t be in a hurry, but risk/reward, profit taking on shorts in case of the return action to the 88.00 area might be considered.
On Tuesday, EUR/GBP showed again some intraday volatility, but at the end of the day the changes were rather limited. Markets were looking out for the appearance of several BoE members including Gouvernor King before a commission of Parliament. Sterling lost some ground in the run-up to this meeting. However, the BoE comments didn’t yield much new info. The BoE keeps all options open whether or not it will have to raise or stop its program of asset purchases. The BoE governor said the UK needs a credible plan to bring down its government deficit. However such a plan should be contingent on the economy. EUR/GBP run into resistance at the 0.9055 area after the start of the meeting and returned the early gains later in the session. The pair closed the session at 0.9024, compared to 0.9010 on Monday evening.
Today, the UK calendar contains the details of Q3 GDP. A small upward revision is expected.
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 bring 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 discount 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, an 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.
