On Friday, the trading stories that were at work earlier in the week continued to do their job. Investors avoided riskier assets. On the currency markets, the ongoing debate on the sustainability of government deficits in some euro-zone member states continued to haunt trading. The euro stays in the eye of the storm and almost every headline on the government finance issue was still enough a reason for additional euro selling. The coincident decline on the (European) stock markets reinforced global aversion to risk and adds to the euro negative sentiment. So, EUR/USD set a new correction low early in European trading. Later in the session, the focus shifted to the US payrolls report. This report painted somewhat of a mixed picture on the US labour market in January. The number of jobs declined by 20K; a gain of 15K was expected. However, the details weren’t that bad and the unemployment rate dropped unexpectedly from 10% to 9.7%. Equity indices tried to regain some ground immediately after the release, but the report was not strong enough to erase to reigning market skeptics. Even more, the Portuguese Parliament passing a bill that might have negative consequences for the budgetary situation of the country prevented investors from taking a more positive attitude, too. So, sentiment turned further negative going into the close of the European markets and EUR/USD set a new low below the 1.36 mark. Late in US trading, some short covering kicked in (both on the stock markets and in EUR/USD). The pair closed the session at 1.3678, compared to 1.3723 on Thursday evening.
During the weekend, the Greek budgetary problems were also discussed at the G7 meeting in Canada. EU officials repeated that Greece will meet the targets of its debt reduction plan. Chairman of the euro group Juncker also said that no IMF money for Greece was needed. Some see this as an indication that some kind of European bail-out plan is in the making. First, it is far from sure that such a ‘bail out’ plan will be announced anytime soon. If this would be the case, it might help to bring some calm the European Government bond markets. However, it is far from sure that it would be a positive factor for the single currency, too. The risk of this precedent opening the way for other ‘bail-out like’ operation shouldn’t be a strong support for the euro. At the start of the new week, it looks that the euro will continue to fight an uphill battle.
Today, calendar is almost empty on both sides of the Atlantic, with only French business sentiment on the agenda. So, the issue of European government finances and global investor sentiment on risk will continue to set the tone for EUR/USD trading. US stock markets performed some kind of end week short-covering rally late on Friday. However it is highly doubtful that this was a precursor for global markets entering calmer waters. So, euro sentiment will probably remain very fragile at the start of this new trading week.
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, from mid January, 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. Recently several US data series and the Fed communiqué of the January meeting very cautiously went in our way of a cyclically inspired USD rebound. Nevertheless, market uncertainty on European government finances and its impact on global investor risk appetite has again become key driver for currency trading. As long as this theme remains the market focus, it is difficult to see a sustained EUR/USD rebound.
Technical picture. Since December, 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. 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 met last week. The trend is obvious and any more pronounced rebound is still seen an opportunity to sell the single currency. Nevertheless, we wouldn’t be surprised to see the pace of the decline slowing a bit after the recent steep losses. 1.3405 (62% retracement MT) is the next high profile target on the EUR/USD charts.
On Friday, trading in the USD/JPY cross rate was an area of extreme calm if compared to the uncertainty and risk aversion seen in most other markets. The pair held a very narrow trading range in the mid 89 area early in Europe and going into the US payrolls release. There was a very brief uptick after the payrolls as equity indices tried to move a few ticks higher. However, stocks came again under heavy pressure at the close in Europe and this kept the yen well bid, too. So, the pair closed the session at 89.25, compared to 89.05 on Thursday evening.
This morning, Asian stocks are mostly lower but the losses are not really excessive. Japanese bank lending data came out on the weaker side of expectations. USD/JPY is still holding within the barriers of Friday’s sideways trading pattern.
Global context: USD/JPY reached a correction low in the 84.83 area at the end of November. In December, the pair staged a remarkable rebound as 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.
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, we think the global cyclical recovery story might still turn out being USD/JPY supportive. The ST picture in this pair is still very fragile. However, for now the 89.15/88.55 area continues to provide support, but the jury is still out whether this first area of defence will hold. We remain cautiously USD/JPY positive MT. However, we wait for the dust to settle on global markets before setting up new longs.
On Friday, EUR/GBP trended cautiously higher. This was remarkable as the euro remained under pressure against the dollar. To be honest, the price moves in EUR/GBP were very limited, but the downside felt like being rather well protected. There were no big stories to guide the price action. The UK PPI data came out mixed. Later in the session there was some market chatter on the exposure of UK bankers to Portugal, Greece and Spain, but this factor was also not really decisive for trading. EUR/GBP closed the session at 0.8741, compared to 0.8711 on Thursday.
Today, UK calendar is again empty (as is the case in the US and Europe). Nevertheless, today could still be an interesting day to monitor sentiment on the UK currency. Last week, EUR/GBP decoupled from the global euro decline and the pair is currently testing the 0.8769/97 area. A sustained break above this level would be an indication that sterling sentiment is waning short-term.
Gobal context: During the August/mid October period, sterling showed additional losses as the BoE increased the amount 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 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 cyclical play. Until now, we advocated that is was still 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. Last week, the BoE shifted as expected to a sit-and-wait approach. However, its assessment on growth and inflation 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 intraday 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 medium term support area 0.8834 support area. However, end January the slide eased and the pair even staged a modest rebound. We have the impression that the 0.8603 reaction low should provide decent support. Euro long calls are quite a risky bet at this stage. Nevertheless, for the EUR/GBP cross rate, we have the impression that some kind of rebound might be in store. A break above the 0.8797 ST range top would be an indication that the recent correction might have some further to go. Sustained trading back above the 0.8834 neckline would call off the short-term alert in this pair.
