On Wednesday, sentiment on EUR/USD changed throughout the session. During the morning session in Europe, EUR/USD was still pushed higher. The recent short squeeze continued going in the EC’s assessment on the Greek budget plan. A reasonably good start of the European equity markets supported the move, too. EUR/USD temporary regained the 1.40 mark, but this barrier obviously was too high to sustain above. The EU indeed certified the Greek austerity plan. Credit spreads on Greek government bonds temporary narrowed after the approval. However, the positive effect was very short-lived. Even more, soon the spreads of countries like Spain and Portugal were pushed wider again. Portugal cutting its planned T-bill placement sparked additional jitters in the European bond markets. So, investors who hoped that the issue of intra-EMU tensions would be out of the way (at least temporary) after the approval of the Greek budget plan were wrong-footed. The US eco data (ADP, ISM non-manufacturing) were close to expectations and had no significant impact on trading. EUR/USD turned south again and the move accelerated during the US trading hours. The move was reinforced by a less positive stock market sentiment. EUR/USD closed the session at 1.3893, compared to the 1.3931 close on Tuesday. The least one can say is that any euro rebound is still considered an opportunity to off-load long positions. Yesterday (and also the previous days), the Obama administration raised verbal pressure on China to address to undervaluation of the yuan. This issue is also said to be on the agenda of this weekend’s G7 meeting on Canada (China is no member of the G7!). For now, the issue is no big impact on the currency markets.
Today, the calendar contains the jobless claims, the US factory orders and the Q4 productivity data. As such, these data are interesting. However, we don’t expect investors to place big bets on the outcome of these data series one day before the key US payrolls report. At its monthly policy meeting the ECB is largely expected to keep rates unchanged. At the January meeting, Trichet indicated that any further steps in scaling back exceptional liquidity measures will be on the agenda of the March meeting. So, any market relevant info out of the press conference should come from Trichet’s assessment on the economy or on Greece (and European government finances). We don’t expect the ECB President to bring any spectacular news. Nevertheless, in the current environment, almost any official talk on the (un)sustainability of the EU government finances might be a good reason for additional euro selling.
Global context. For most of 2009, the improvement in global risk appetite, together with exceptionally low US interest rates, were both good reasons for investors to hold back on safe haven dollar long positions, even more as the US dollar became a funding currency for setting up carry trades. However, the impact of this trading paradigm faded at the end of last year. There was growing evidence that the US economy was gaining traction and this fuelled market speculation that the era of close-to-zero US interest rates might not last till eternity. Markets contemplating that the Fed might reduce policy stimulation sooner than expected triggered a USD shortcovering move. Euro negative headlines (Greece) reinforced the EUR/USD correction. From that point, we were looking for clues whether the US economy was/is improving at a pace strong enough for the Fed to scale down policy stimulation in a notthat- distant future. Some softer than expected eco data early January pulled some cold water on the hopes for the Fed to raise rates anytime soon. Nevertheless, we kept a cyclically inspired sell-on-upticks approach in EUR/USD. However, the Greece saga (and other intra-EMU tensions) became the most influential factor for EUR/USD trading, rather than the global cyclical picture and its policy implications. So, we couldn’t ignore the strong technical signal of the break below the 1.4220 level, even as it was due to outright euro weakness. Last week’s Fed decision, very cautiously went in our way of a cyclically inspired USD rebound. The same applies to the US Q4 GDP release and this week’s strong ISM. So, we see this as confirming or even reinforcing our EUR/USD sell-on-upticks approach. In this framework, the EUR/USD correction on Monday and on Tuesday was only considered a technical repositioning after last week’s sharp decline. Yesterday’s dip in the euro (admittedly again due to tensions on the likes of Greece and Portugal) reinforced our view that it would be difficult for the euro to perform a sustained rebound. We hold on to our euro negative/dollar positive bias. With respect to the USD rebound potential, tomorrow’s payrolls report is the next point of reference.
Technical picture. Last month, EUR/USD faced quite a forceful correction on the longstanding rally from March. The pair lost several important support levels, including the longstanding uptrend line, indicating that the EUR/USD bull-run has run its course and that EUR/USD trading is entering a new era. We started the new year with a sell-on-upticks approach for EUR/USD aiming for return action to the bottom of the 1.4626/1.4220 range. The break below this range bottom triggered a new EUR/USD downleg, making the picture for the pair outright negative. The 1.3748 June reaction low is the next high profile target/support level on the charts. We continue to apply a sell-on-upticks approach for return action to this 1.3748 target. In a tactical approach, partial profit taking on EUR/USD shorts might be considered in case of returning action to this high profile level. In any case, won’t row against the tide.
On Wednesday, USD/JPY performed quite a remarkable rebound, especially as the pair recently showed a disappointing performance on eco data/news headlines that were intrinsically positive for the pair. To be honest we didn’t see a big story to really explain the move. Early in Europe, a decent stock market performance might have been a help. However, this explanation didn’t work in the afternoon. In our view, the US eco data were also not really a good enough reason to explain the rise in USD/JPY. Nevertheless, the break beyond the ST highs in the 90.95 area stripped additional buying stops. The pair closed the session at 90.98, compared with 90.38 on Tuesday evening. Are negative headlines on Toyota weighing on the Japanese currency?
This morning, Asian stock markets are in negative territory, but the yen fails take advantage of it. This might be another indication that short-term sentiment is turning negative on the Japanese currency. Technical considerations will probably continue to dominate USD/JPY trading going into tomorrow’s US payrolls report.
Global context: USD/JPY reached a correction low in the 84.83 area at the end of November. During the month of December, the pair staged a remarkable rebound. Improved USD/JPY sentiment after the better than expected US payrolls early December was enough a reason to take profit/scale down USD/JPY short exposure. End December, the pair even temporary regained the 92.50 resistance area. The new Japanese Fin Min softening its tone on the yen added to the USD/JPY supportive picture, but early January the weaker US payrolls blocked the rebound. In a medium term perspective, the December USD/JPY rebound called off the MT downtrend of the US dollar against the yen. Since the start of the new year, the USD/JPY rebound shifted into a lower gear. Recently we took a cautiously positive bias for USD/JPY. In a broader perspective, we see USD/JPY longs as a good trade to play the global recovery story. The recent loss of momentum on global equity markets didn’t really support our case. Nevertheless, as we hold on to our global positive eco view and we think the global cyclical recovery story might still turn out be USD/JPY supportive. At the end of last week, we indicated that we were looking for confirmation to see whether the 89.14 reaction low would be a good base to (re)install/add to USD/JPY long positions. The reaction to the Q4 US GDP figure and to the US ISM was constructive but far from spectacular. Yesterday’s rebound makes us feel more comfortable with our buy-on-dips approach. Nevertheless at least partial stop-loss protection is still warranted as the picture is far from clear yet.
On Wednesday, trading in the EUR/GBP showed some intraday swings, but in the end, the pair was little changed. A series of reasonably good UK data published before the open of the European and the UK markets supported the sterling early in the session. EUR/GBP dropped to the 0.8710 area. However, global euro gains going into the EC assessment on Greece pushed EUR/GBP higher, too. On top of that, the UK PMI for the services sector disappointed as it dropped from 56.8 from 54.5. EUR/GBP almost exactly tested the 0.8769 reaction high (Monday). However, a break didn’t occur and later in the session the euro negative headlines (Greece, Portugal) came again to the forefront. At the end of the day, EUR/GBP was seen at 0.8742, almost unchanged from the 0.87415 close on Tuesday evening. So, in the end investors apparently opted to wait for today’s BoE meeting.
Today, Halifax house prices will be published. However, in the UK, markets will focus on the BoE meeting. The bank is wildly expected to announce a pause in its asset purchase scheme of buying £200B worth of assets. However, we expect the bank will be very cautious in its assessment on the economy and keep the door open for additional asset purchase in case it would be necessary, further out. On the other hand, it will be interesting to see how the BoE will frame (downplay?) the recent spike in inflation. So, one might expect the bank to bring a cautiously soft message. In there, this should not really be a big help for the UK currency. Of course, there is still the euro-side of the coin.
Global context: During the August/mid October period, sterling showed additional losses against the euro as the BoE extended its policy of quantitative easing through a rise in its program of asset purchases. This policy was maintained going into the end of the year, but the UK currency entered calmer waters. EUR/GBP settled in a 0.8830/0.9154 sideways trading pattern. Recently, there were some cautious signs that the UK economy is leaving recessionary territory, too. From a market point of view, the question is whether the UK economy has already reached the point where sterling could become some kind of a recovery play. Until now, we considered it is too early to conclude that recent signs of improvement will be enough for the BoE to scale down policy stimulation (or raise interest rates) in the foreseeable future. We also didn’t see any signs yet that the BoE will be more proactive in scaling back exceptional policy measures/policy stimulation compared with the ECB (or the Fed). This week’s BoE policy meeting (when a new inflation report will be available) will be the next point of reference for BoE policy.
We started the year with a neutral bias for this pair with range trading in the established 0.8834/0.9155 preferred. Global euro weakness due to worries on the Greek budgetary situation, has overthrown this strategy. The pair dropped below several key support levels, forcing us to leave our longstanding EUR/GBP positive (de facto sterling cautious) attitude. The picture in EUR/GBP turned negative and the 0.8400 August reaction low came again in the picture. Looking at the eco fundamentals, we have the impression that the correction (sterling rebound) has gone far enough. However, this is obviously not a good enough reason to row against the EUR/GBP negative tide, yet. Nevertheless, we stay alert. The consolidation at the end of last week/early this week is a first indication that the rebound of sterling against the euro is loosing momentum. We don’t front-run on today’s BoE decision. However, we are inclined to think that further upside in sterling will be limited. So, any further losses of EUR/GBP should come from euro negative headlines. Even so, we still assume that the 0.8603 reaction low should provide decent downside protection.
