On Monday, global markets took a calm start to the new trading week. There were hardly any eco data to inspire trading. The German January industrial production report came out reasonably well (strong upward revision of the December reading) but the market reaction was close to non-existent. Stocks were also unable to provide a clear guide for trading as they failed to extend the post-payrolls rally from Friday. This lack of follow-through gains blocked the topside in the EUR/USD cross rate. So, technical considerations continued to dominate the price action and the pair basically developed in a sideways trading pattern in the upper half of the 1.36 big figure during most of the European trading hours. As expected, there was a lot of market talk about the ideas that have been raised of late to address Greece-like problems in a structural way (cf the idea of a ‘European Monetary Fund’). It would be a europositive development if the Greek crisis at some point would lead to a more adequate European institutional framework. However, any such proposals most probably still have a very long way to go and the outcome of this debate is still highly uncertain. This is a much too long call for markets. So, for now, the day-to-day scrimmages on Greece and the global risk aversion/risk risk appetite will continue to have a big impact on EUR/USD trading short-term. Going into the close of the European markets, the EUR/USD currency pair dropped south of the intra-day trading range and slipped to the low 1.36 area. Technical considerations prevailed, but some market comments also linked the move to headlines from ECB’s Stark as he opposed the idea of an EU rescue fund. As said, the road to a change in the EU institutional framework will be long and bumpy. EUR/USD closed the session at 1.3634, almost unchanged from the 1.3626 close on Friday evening. This morning, Asian stock markets copied the lackluster
This morning, Asian stock markets copied the lackluster performance of the US and European markets, with China outperforming. The EUR/USD cross rate is holding close to yesterday’s lows in early Asian trade this morning.
As was the case yesterday, the calendar is very thin, both in the US and in Europe. So, currency traders will again have to look for other headlines to inspire trading. By default, Greece and the way Europe will try to manage its budgetary and institutional deficits are always an option. The panic on Greece has probably peaked, but yesterday’s price action indicated that the debate on institutional reforms in Europe is no support for the single currency (yet). So, we expect EUR/USD to extend the sideways consolidation pattern of late. Nevertheless, the upside in the EUR/USD cross rate looks still difficult even as pressure from Greece is fading. On top of that, the Portuguese deficit reduction also got very little (positive) attention from currency traders. On the sidelines, the visit of Greek PM Papandreou at the White house will get ample media coverage. However, one can doubt that this meeting will yield any hard info for the currency market.
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. EUR/USD breaking below the 1.4220 support was a strong technical signal, 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 support fro Greece (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. To be honest, we don’t expect the recent (moderately positive) 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 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 (1.3433 = 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 Monday, trading in the USD/JPY cross rate was again very boring as the pair was locked in a very narrow corridor. The pair failed to extend the post-payrolls gains, mirroring the directionless trading on the currency markets. USD/JPY closed the session at 90.31, compared to 90.28.
Overnight, Asian stocks are holding close to yesterday’s closing levels. Japanese leading indicators and the machinery tool orders came out strong, but as usual had no impact on currency trading. Global factors still prevail in setting the tone for yen trading. The BOJ considering an extension of the supportive monetary policy, in theory is a negative for the yen. However, the question is whether a limited move will have that much of an impact on the yen. Of course, at this time of the year, talk on repatriation flows will resurface going into the end of the fiscal year. To be honest, looking at the ‘outcome’ of this issue in recent years, we don’t give too much weight to this repatriation talk.
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 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 case markets remain (cautiously) optimistic on the global recovery, we see room for further USD/JPY gains. So, a buy-on-dips approach is preferred. The 92.15 reaction high is the next important target on the charts. Of course, USD/JPY traders should take a close eye at the technical charts of the major equity indices, with the S&P close to the recent year highs.
On Monday, sterling gave back the post-payrolls gains. So, the idea of the UK currency taking advantage of an improvement in global risk appetite was rather shortlived. The pair reached an intraday low in the 0.90 area early in European dealings, but from there the UK currency drifted lower for most of the session. The sell-off accelerated at the close of the European market. Technical selling pressure from cable and talk of repatriation flows on the back of a big coupon payment in Gilts were said to have reinforced the move. EUR/GBP closed the session at 0.9048, compared to 0.9000 on Friday evening.
Overnight, the financial press gives some attention to a report from Moody’s that said Britain will face a difficult balancing act in how and when to reduce support for the banking sector. The exit could also have (negative) consequences for the credit ratings of some bond issuers. On top of that, the polls suggesting another close call between Labour and the Conservatives is adding to the sterling negative sentiment. The RICS house price balance this morning disappointed too as it came out at +17% while a 30% reading was expected. So, sterling continues to cede ground. Later today, the January UK trade balance figures will be published. Apparently there is little room for a negative surprise (from a sterling point of view).
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 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.
