On Thursday, uncertainty on the sustainability of government finances in some European countries continued spread and affected almost all markets. Even more, uncertainty was/is gradually turning to panic. Yesterday, the focus was on Portugal and on Spain, rather than on Greece. The exact source of unrest is not always that clear. Spain yesterday sold €2.5B of 3-year bonds in an auction that was well re-ceived, but this was hardly any help to ease tensions on this issue. On the contrary, markets focused on the Spanish Government backtracking on a pension reform plan. Uncertainty on the budget deficit ever more weighed on the Spanish stock markets and gradually affected almost all asset classes in Europe. At ECB press conference, Trichet repeated that European countries should address that issue of government deficits and structural reforms. However, he didn’t bring any new info on this issue. At the same time, the higher (worse) than expect US jobless claims added to the global negative sentiment. Investors threw the towel on riskier assets. In the current environment, this couldn’t but trigger a big exit on the single currency, too. EUR/USD was traded just above the 1.3850 support area at the start in Europe. During the morning session in Europe, the slide still developed in a gradual way, even as the pair dropped below the recent low. However, the move accelerated in the US and EUR/USD went for a test of the key 1.3748 support area at the end of the European trading hours. After the close of the European markets, headlines on a political dis-pute in Portugal on a regional financing bill that might have adverse consequence for the global debt position of the country only added to global nervousness. So, EUR/USD closed the session at 1.3723, compared to 1.3893 on Wednesday eve-ning. So, the pair dropped below the High profile level of 1.3748 (June low).
Today, normally one should expect the US payrolls report to be the focus for mar-kets. In the current environment, the question is whether this payrolls report will be able to turn market attention away from investors’ fixation on the Government defi-cits. A better than expected payrolls report probably might help to ease the nerves. Recently we advocated that strong US data should become again dollar supportive. However, after the recent spike in risk aversion with Europe in the eye of the storm, we wouldn’t be surprised to see the EUR/USD getting some relief from a better than expected payrolls report. In a case of a poor figure, the risk is for panic to spread and it is difficult to see the euro gaining in such a scenario. So, it wasn’t/isn’t our long-term view for risk to become again the dominant factor for currency trading. How-ever, at least for now we have to admit that risk is completely back in play.
This weekend, there is also a G7 meeting in Canada. Over the previous days, sev-eral officials indicated that currencies and in particular the undervaluation of the yuan might be discussed as part of an approach to address to problem of global imbal-ances. Of course China is no member of the G7 and as ECB’s Trichet indicated yes-terday, the G20 has become the prime forum for international cooperation, no longer the G7. So, we don’t expect too much out of it for markets.
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 short-covering move. Euro negative headlines (Greece) reinforced the EUR/USD correc-tion. From that point, we were looking for clues whether the US economy was/is im-proving at a pace strong enough for the Fed to scale down policy stimulation in a not-that-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 saw this as confirming or even reinforcing our EUR/USD sell-on-upticks approach. However, this week, sen-timent has turned again. To be honest, risk and not the cyclical recovery story has again become the key driver for currency trading. It will be interesting to see the market reaction to today’s US payrolls. However, in the current environment, it is still difficult to put forward a scenario for a sustained EUR/USD rebound. Or is the market already that much short euro so that a short squeeze might be in the making?
Technical picture. Last month, EUR/USD faced quite a forceful correction on the longstanding rally from March. The pair lost several important support levels, includ-ing 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 was the next high profile target on the charts this target was meet yesterday. There is absolutely no good reason to row against the tide. The EUR/USD trend is firmly south. Nevertheless, in a day-to-day perspective we wouldn’t be sur-prised to see the EUR/USD sell-off shifting into a lower gear going into weekend).
On Thursday, global tensions were building throughout the session and thus helped the yen to take up is role as safe haven. The yen gains were still limited in Asia and early in Europe, but the Japanese currency gained traction in the US. The pair break-ing below the Wednesday low in the 90.10 area just at the close of the European markets when panic was building, trigged a free-fall in USD/JPY. The pair even dropped below the 89.14 reaction low/support and closed the session at 89.05, com-pared to 90.98 on Wednesday. So, in times of real panic the yen is still the preferred currency to look for shelter, even as there is a lot of uncertainty on the Japanese government finances, too.
This morning, Asian stocks join the decline on the European and the US stock mar-kets. Most indices show losses of between 2% and 3%. This is of course no good news, but the impression is that it could have been even worse. USD/JPY regained some of yesterday’s steep losses.
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 De-cember 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 suppor-tive picture, but early January the weaker US payrolls blocked the rebound. In a me-dium term perspective, the December USD/JPY rebound called off the MT down-trend 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 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 sup-portive. 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. This week, USD/JPY installed a gradual uptrend. However, yesterday’s setback erased the gains build since last week. We remain cautiously USD/JPY positive MT. However, we wait for the dust to settle before setting up new longs.
On Thursday, sterling traders were counting down to the announcement of the BoE policy meeting. EUR/GBP hovered in a 0.8716/0.8759 trading range going into the announcement. The pair reached its intraday peak just before the release. Markets apparently priced in some outside risk that the Bank could still raise the amount of asset purchase. However, the BoE perfectly kept to the widely anticipated scenario of a pause in the asset purchases. EUR/GBP gave up the gains made in the run-up to the announcement, but after all, the impact on EUR/GBP trading was very limited. Looking into the communiqué, the BoE kept the door open for further purchases should the outlook warrant them. We had the impression that the Banks’ assessment on growth and the inflation risk was rather dovish. However, even that was not really a big surprise. The BoE is in a wait-and-see mode. EUR/GBP returned temporary to the intraday lows at the time of the ECB press conference. However, there was no follow-through price action on the downside either. Later in the session, EUR/GBP felt some pressure from the global euro sell-off but after all the damage was limited. EUR/GBP closed the session at 0.8711, compared to 0.8742 on Wednesday.
Today, UK calendar contains the PPI release. We don’t expect this release to be really important for the currency market.
Global context: During the August/mid October period, sterling showed additional losses as the BoE increased the amount of asset purchases. This policy was main-tained 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 monetary policy 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 that was is too early to conclude that recent signs of improve-ment will be enough for the BoE to scale down policy stimulation (or raise interest rates) in the foreseeable future. After yesterday’s policy meeting, the BoE shifted as expected to a sit-and-wait approach. However, its assessment on growth and infla-tion was still rather soft. So, we don’t have any indication that the BoE will be a front-runner in scaling back policy stimulation when compared to the Fed or the ECB. In this context, think that the recent rebound of sterling has already gone far enough. Of course the euro is still haunted by the EMU budget woes and the tensions on the in-traday EMU government bond markets. This continues to weigh on the EUR/GBP, too. Nevertheless, we think that EUR/GBP should be far less sensitive to this issue compared to EUR/USD.
Recently, the picture for EUR/GBP was negative as the pair dropped below the me-dium term support area 0.8834 support area. However, since last week the slide eased and the pair even staged a modest rebound. It is still too early call of the MT downward alert. Nevertheless, we have the impression that the 0.8603 reaction low should already provide decent support. Range trading in the 0.8603/0.8834 trading range is favored short-term.
