On Wednesday, global dollar weakness was the name of the game and this was also visible in the EUR/USD cross rate. EUR/USD continued to push higher throughout the whole trading session. The break of the previous top at (1.5064) triggered a small acceleration in the move and this first USD selling wave halted in the 1.51 area. The move slowed early in US trading. The US eco data in general were slightly better than expected but had only a limited impact on trading. At best, they helped the US stock markets to open with small gains. In this respect we also take a closer look at the link between EUR/USD and the stock markets/risk appetite. Yesterday and on Tuesday, it was obvious that the decline of the dollar/rise in EUR/USD was not only the result of the price action on the stock markets. EUR/USD made quite a strong increase even as the gains on the US and European stock markets were quite limited. Intrinsic dollar weakness, rather than investor risk appetite, most probably was the driver for the EUR/USD upmove. The minutes from the 3-4 Nov Fed meeting (published on Tuesday evening) and recent soft Fed talk on interest rates reinforced the market feeling that the US doesn’t feel any need to address the current dollar weakness anytime soon. The Fed mentioned the slide of the dollar in the minutes, but it was considered an unwinding of safe haven flows and it is still developing in what the Fed sees as an orderly way. So, from a US point of view, what’s the problem? On top of that, until now, the US hardly pays any price for its ’weak dollar’ policy on the interest rate markets. On the contrary, for the first time since early June US 10-year yields were again equal to the 10-year German yields as US bonds recently outperformed their European counterparts. On top of that week’s US auctions again went (very) well. So, in this environment the US/Fed is not at all under pressure to change the course of events. Currency traders apparently have drawn their conclusions. EUR/USD closed the session at 1.5134, compared to 1.4968 on Tuesday evening.
Today, US markets are closed for the Thanksgiving holiday. In Europe the German CPI data for the month of November are on the agenda. However, they are not really a big factor for the currency market. So, in this context, technical considerations will play an important role. We’re not at the point yet of real dollar panic, but USD nervousness is obviously mounting. The least one can say is that there is no good reason available the blow against the wind.
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. However, the 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. We would not be surprised that we are coming very close to this point. Will the decline of the dollar become of factor of global uncertainty? If so, this is of course not a good reason to row against this dollar negative tide, on the contrary. The trend is obvious and we don’t see any trigger available to change the course of events anytime soon.
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 was waning. However, yesterday’s break above the previous highs is a new factor from a technical point of view. Recently we preferred a buyon- dips approach within the 1.4626/1.5064 trading range. We don’t feel pressured to jump in after yesterday’s break, but the upside pressure is obvious. We continue to avoid al USD long exposure.
On Wednesday, the global USD sell-off also hammer the USD/JPY cross rate. The story was not different from what happened in other USD cross rates, but the move in USD/JPY was even a bit more pronounced. Technical factors reinforced the momentum of the move. The pair dropped below the 0.8835/88.01 support area, which triggered a wave of stop tripping and the move continued going into the close. USD/JPY close the session at 87.35, compared to 88.50 on Tuesday.
This morning, the trend was extended and the break of the 87.10 area (Year low) sparked a second wave of stop tripping. Japanese authorities came out to speak, but their talk was remarkably soft. The move was seen as global dollar weakness and not yen strength. As usual they indicated that they are watching the price action, but a deputy Finance minister even openly indicated that Japan had no plans to intervene at this stage. Fin Min Fuji repeated that intervention is still an option in case of abnormal moves. Japanese stocks were slightly lower and the strength of the yen for sure is part of the explanation for this. However, the damage was not excessive yet.
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. So we took profit on USD/JPY shorts at this key support level. We were a bit surprised for Japanese officials to come out as soft as they did this morning. As is the case for EUR/USD we don’t feel pressured to jump in with USD shorts at the current juncture. Nevertheless, the risks obviously remain to the downside. We avoid USD long exposure.
On Wednesday, sterling started the session on a strong footing. Apparently, some market player expected a more pronounced upward revision of the Q3 UK GDP. EUR/GBP dropped to the 0.8980 area going into this release. However, the UK GDP was only marginally revised higher. This pulled the trigger for a sterling profit taking move. EUR/GBP trended higher throughout the session and closed the day at 0.9060 compared to 0.9034 on Tuesday. Global euro strength probably plays also a role. Compared the monetary situation in the US and in the UK are quite alike. So, EUR/GBP gain ground on the same theme shouldn’t come as a surprise.
Today, the UK calendar contains the CBI distributive trades report. A few days ago, one would expect a positive figure to support the UK currency. However, in the current environment were not that sure on such a reaction. Global dollar and sterling negative factors might to set the tone for trading.
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. A first test of this area was rejected early this week, but upward pressure is building with the pair making a new attempt this morning. We maintain a buy-on-dips approach for EUR/GBP. The 0.8900 ST range bottom is getting out of reach.
