On Friday, traders in almost all markets were looking out for the US payrolls report. Other trading themes (like Greece) moved a bit to the background. There were only few data on the agenda in the Europe. German factory orders came out much better than expected, but as usual the release was largely ignored by the currency markets. So, EUR/USD settled in a tight range below the 1.36 mark going into the US payrolls report. The report came out better than expected as only 36K jobs were lost, while markets expected a decline by 68K. On top of that, details of the report suggest that when weather related issues are out of the way, the US economy is to the point of positive jobs’ growth. So, the report brought a positive message on the US economy. However, for the currency market the picture is not that straightforward. Should currency traders play the card of the cyclical recovery of the US (and thus buy the dollar). Or should they look at the stock markets and play the risk theme? In the latter case they should buy the euro. In fact, they did both on Friday. In the first minutes after the payrolls, EUR/USD slipped south. The pair reached an intraday low in the 1.3530 area. However, the dollar failed to hold on to its gains. Stocks extended there rebound and this move supported more risk-sensitive currencies like the euro. So, EUR/USD regained the initial losses and even moved beyond the 1.36 mark. Nevertheless, given the outright positive reaction on the equity markets, the day-to-day chances in EUR/USD were still very limited. The currency market obviously didn’t know which card to play. EUR/USD closed the session at 1.3626, compared to 1.3581. On Friday evening, the meeting of German Chancellor Merkel with the Greek PM Papandreou, as expected, didn’t bring any new info/details on potential help from Germany or Europe for Greece.
Over the weekend, French policymakers including the President were very vocal in their support for Greece, if support would be needed. However, once again the commitment lacked any hard details.
This morning, Asian investors joined the global reflation trade the re-accelerated after the US payrolls on Friday. This kept the riskier currencies will bid. EUR/USD is seen in the 1.3675 area at the moment of writing;
Today, the calendar is very thin. In Europe, the German industrial production data for the month of January will be published. It will be interesting to see whether they might amend the rather bleak picture as it was painted from other data series at the end of last year and at the start of this year. However, the impact on the currency market will be limited. The US calendar is empty. So, currency traders can not but keep a close eye on the stock markets today. Of course, market talk on Greece will most probably continue. The issue on the details of any European/German aide for Greece is no resolved yet. Nevertheless, the question is whether after the recent developments/ commitments the case for holding ‘Greek short’ positions is still that strong. We wouldn’t be surprised to see some easing of pressures on Greece short- term. Greece moving somewhat to the backstage might be (slightly) euro supportive short-term. Nevertheless, as already indicated last week, the EUR/USD currency pair apparently has entered some kind of no-man’s-land and we don’t expect this stalemate to be broken anytime soon. Or will a strong rise in equities be able to do the job?
Global context. For most of 2009, the improvement in global risk appetite, together with exceptionally low US interest rates, were good reasons for investors to hold back on safe haven dollar long positions. However, at the end of last year, there was growing evidence that the US economy was gaining traction. This fuelled market speculation that US interest rates might not stay low till eternity and triggered a USD short-covering move. 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 not-that-distant future. So, we installed a cyclically inspired sell-onupticks approach in EUR/USD. Since mid January, the Greek 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. US data series very cautiously continue to go in our way of a cyclical USD rebound. Nevertheless, market uncertainty on European government finances and its impact on global investor risk appetite remained the key driver for currency trading. The EU ‘solution’ (without any details) to some extent eased the tensions on higher-yielding EMU government bonds, but uncertainty still prevails. The Greek issue highlighted also the weak points of the EMU framework. This continues to weigh on the euro. On top of that, recent economic evidence didn’t support the cyclical case of the euro either (cf. poor EU growth and production data recently). The Fed discount rate hike mid February, even as it is in the first place a technical step on the way to normalization of the money markets, still might be seen as supportive to our cyclical USD rebound. So, we continue to feel comfortable with our long term EUR/USD negative bias.
In a short-term perspective, EUR/USD has entered a sideways consolidation pattern. Quite a lot of bad news had apparently been priced in for the euro. This assessment remains valid. To be honest, we don’t expect the recent developments on Greece to be the trigger for a sustained euro rebound. EUR/USD traders have reached a point where they are looking for a new trading theme. In such a context we keep a close eye on the technical charts. For now, we hold on to our view that a sustained EUR/USD rebound beyond the 1.3850 resistance area won’t be that easy (cf infra), but keep an open mind the see how a potential new trading theme (if it would be found) will affect trading.
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 entered a new era. The trend in this pair is obvious and any more pronounced rebound is still seen an opportunity to sell the single currency. For now, the 1.3850 area (previous high) is the first barrier on the topside. Recent price action reinforced our feeling that a (swift) return to/beyond this barrier won’t be easy. 1.3405 (62% retracement) is the first target on the EUR/USD charts. LT the 1.2886 April low might gradually come into the picture. Recently EUR/USD tested three times the 1.3460/33 support area, but a break didn’t occur (1.4333 = new low). This is an indication that the downside in this pair was a bit exhausted. We don’t feel any need to change our standing EUR/USD negative bias. This remains a sell-on-upticks market. Nevertheless, short-term we wouldn’t be surprised to see some more sideways price action in the 1.3443/1.3850 trading range.
On Friday, the US payrolls report was also was also the key factor (if not the only one) for USD/JPY trading. In contrast to the hesitant reaction in EUR/USD, the reaction in USD/JPY was straightforward. USD/JPY gained around one big figure as it jumped from the mid 89 to the mid 90 area. So, for this cross rate, the cyclical rebound in the US and the risk-theme pointed in the same direction. USD/JPY closed the session at 90.28, compared to 89.02.
Overnight, Asian stocks joined the positive sentiment in the US and Europe at the end of last week. Japanese current account data/trade balance data came out better than expected. However, quite some market attention goes to the Y/Y negative reading of the bank lending data (-1.5% Y/Y) even as it was slightly better than expected. This is seen keeping the BOJ under pressure to take additional steps to fight deflation. USD/JPY is slightly higher compared to Friday’s close, but the gains are not really spectacular given the performance of the equity markets. Elsewhere in the region, there is again some market talk on China preparing steps to make the link with the US dollar less strict after some hints from the Chinese commerce minister on this issue.
Recently, we had a cautiously positive bias for USD/JPY, as we saw USD/JPY longs as a good trade to play the global recovery story. The loss of momentum on global (equity) markets since the end of January didn’t really support our case and last week’s break below the key 88.55 support obliged us to draw our conclusions and step aside on our USD/JPY long call.
Nevertheless, with the global recovery story still on track and with the BOJ under pressure to do something on deflation, we didn’t feel any need to be engaged in yen long exposure at this stage. On Friday, we indicated that we were looking for a technical confirmation that the test of the downside was indeed rejected before reconsidering USD/JPY long exposure. This confirmation came after the payrolls as the pair returned beyond the 90.00 area. In a contest of investor optimism on the global recovery we see room for USD/JPY to revisit the 92.16 reaction high. So, a buy-on-dips approach is preferred.
On Friday, the rebound of sterling against the euro continued. There were not really any hard news facts to support this move. Remarkably, the biggest part of the sterling gains occurred after the US payrolls. This suggests that sterling profited from improved risk sentiment even more than was the case for the single currency. After recent negative sentiment on the UK currency, such a reaction shouldn’t really come as a big surprise. EUR/GBP closed the session at 0.9004, compared to 0.9033 on Thursday.
Today, calendar of eco data is almost empty. Only a speech of BoE’s Banker is scheduled.
Global 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. Recently, there were some very 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 a cyclical play. Early February, the BoE shifted as expected, to a sit-and-wait approach. However, its assessment on growth and inflation remains soft and this view was confirmed in the February inflation report. 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. This was the main reason why we didn’t see a case for a sustained rebound of sterling. Of course, the euro was haunted by the EMU budget woes and the tensions on the intra-EMU government bond markets. This issue continued to weigh on the EUR/GBP pair, too. Nevertheless, we held/hold on to our assessment that EUR/GBP should be far less sensitive to this issue compared to EUR/USD.
In January, the picture for EUR/GBP was negative as the pair dropped below the medium term support area (0.8834). At the end of January, the slide in EUR/GBP eased and the pair even staged a modest rebound. Two tests of the 0.8834 neckline were rejected, but finally the break succeeded. Apparently, the ongoing BoE talk on the possibility of more QE ‘convinced’ markets that any interest support for sterling is still very far away. Other issues (risk for a hung Parliament) only deteriorated the fate of sterling. The re-break of the 0.8834/41 area materially improved the picture for EUR/GBP. After the test of the 0.9154 resistance, some consolidation kicked in. Nevertheless, we still see the price action at the end of last week as corrective in nature. We don’t expect any sustained sterling rebound anytime soon. We maintain a buy-on-dips approach. The 0.9150/54 is the first high profile mark on the charts. 0.9240 is the next medium term target.
