On Thursday, the euro stayed under pressure. The rift between Greece and Germany on a European support plan for Greece continued to weigh on the single currency. Even more, this split does not only affect Germany and Greece. A lot of other countries in Europe will (have to) join one side or the other. This rift concerns the hart of the euro zone framework. How should the EU/EMU handle the economic consequence of a different policy from member states? Should the strong and orthodox members help/support the economies with weaker fundamentals? Or, should the ‘sinners’ in the first place solve their own problems? The bickering between Germany and Greece (and Greece still keeping open the option to go to the IMF) is only another illustration that the EU institutional framework is not really adapted to handle these important issues. So, EUR/USD dropped below the 1.37 mark yesterday morning after a news report said that Greece was considering going to the IMF during the weekend of Easter. This ‘threat’ was ignored (or at least downplayed) by the Greek government later yesterday, but the issue was still on the table. To be honest, after this initial ‘incident’, the EUR/USD pair settled in a 1.3650/1.3700 trading rage till late in the European session. So, while euro sentiment was not positive, the damage for the single currency was not excessive either. However, at the end of European trading, EUR/USD was hammered again. This time the trigger didn’t come from Europe but from the US. At that time, there were market rumours that the Fed might again raise the discount rate. These rumours didn’t materialize, but the fact that EUR/USD lost another 50 ticks on these rumours only illustrates the heavy sentiment towards this currency pair. EUR/USD closed the session at 1.3608, still quite a big loss compared to the 1.3738 on Wednesday evening.
Yesterday, there was also a remarkable move in the EUR/CHF cross rate. A SNB member was quoted that consumers and firms should prepare for higher rates and with FX rates being set by market forces. This assessment of course undermined the case for FX interventions and the CHF jumped higher, against the dollar and even more against the euro.
This morning, there is no big news on Greece. EUR/USD is still being traded close to yesterday’s closing levels. Later today, the calendar of eco data is empty in the US. In Europe only some second tier eco data are scheduled for release. So, global factors and the Greek issue will continue to set the tone for trading. Stocks are cautiously higher in Asia this morning. Of course, uncertainty will continue to weigh on the single currency going into next week’s EU summit. In this environment we don’t see much room for a rebound yet. The topside in the EUR/USD cross rate will most probably remain difficult until the Greek issue is out of the way.
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. 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 be raised at some point and triggered a USD shortcovering move. From that point, we were looking for clues that 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. We installed a cyclically inspired sell-on-upticks 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 important technical support levels was a strong warning, even as it was due to outright euro weakness. US data series very cautiously continued 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 an important driver for ERU/USD trading. The EU support for Greece (without any details) temporary eased the tensions but uncertainty still prevails. The Greek issue highlighted the weak points of the EMU framework. This continues to weigh on the euro. The rift between Germany and Greece only illustrates the institutional deficit of the single currency. The Fed maintaining its commitment to keep rates low for an extended period of time is in theory no support for the dollar. However, for now, this looks like a story of euro weakness rather than dollar strength.
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. Over the past weeks, EUR/USD settled in a ST consolidation pattern. The pair regaining the MT downtrend line since December even might be seen as ST positive for this pair. Nevertheless, for now, we don’t feel any need to change our standing EUR/USD negative bias. This remains a sell-on-upticks market. We continue to put the risk for pair to drift further south in the 1.3433/1.3850 trading range.
On Thursday, there was still no big story to tell on USD/JPY trading. The pair set an intraday low early in Europe on global markets uncertainty (Greece), but there was no follow through price action as stocks held up very well after all. Later in the session, rumours on a potential Fed discount rate high also triggered a temporary spike in USD/JPY, but once again the move had not strong legs. USD/JPY closed the session at 90.39, once again little changed from the close of the previous session(s).
This morning, Asian stocks show moderate gains, but the Nikkei came close to the January cycle high. The USD/JPY pair is slightly higher this morning, but in a broader perspective, trading in the USD/JPY cross rate is still blocked in an very tight sideways consolidation pattern.
Already for quite some time we have a cautiously positive bias for USD/JPY, as we saw USD/JPY longs as a good trade to play the global recovery story. However, for now trading in this pair fails to find a clear driver.
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 (even as the pair dropped temporary below the 88.55 support area). After the rejected test of the downside two weeks ago, the pair returned beyond the 90.00 area. This called off the downward alert. To be honest, this week’s Fed decision was no big help for our USD/JPY long call. Nevertheless, in case markets remain (cautiously) optimistic on the global recovery, we continue to 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.
On Thursday, sterling took a breather after Wednesday’s gains on the back of a strong labour market report. Cable drifted sideways for most of the day. EUR/GBP lost again a few ticks, mirroring global investors’ unease with the single currency as the political debate on aid for Greece continued to haunt the single currency. The UK data were mixed with the budget data coming out a bit better than expected (after a poor January figure). On the other hand, money supply data and the March CBI industrial trends survey came out on the soft side of expectations. EUR/GBP reached an intraday low in the 0.8930 area early in European dealings. The pair then hovered up and down in a tight range in the mid 0.89 area. A new spot of euro weakness occurred late in the session (new intraday low at 0.8916), but a break lower didn’t occur. EUR/GBP closed the session at 0.8927, compared to 0.8964 on Thursday.
Today, the UK calendar is empty. This morning, there are some headlines on the screens from BoE’s Sentence as he said that there was still a risk that Britain may suffer a double dip recession, although this was not the most likely scenario. Yesterday, he also indicated that monetary policy might offset the necessary fiscal tightening. This doesn’t suggest that the BoE will move to a tighter policy anytime soon. EUR/GBP is regaining some ground this morning.
Global context: Since the start of the year, sterling showed two faces. At first, the UK currency was will bid. The decline in EUR/GBP was for an important part due to euro weakness. However, cable holding up rather well suggested that some investors saw value in playing some kind of cyclical rebound in the UK currency, too. However, UK data were not really convincing. 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 as if left its policy rate and the amount of asset purchases unchanged. However, its assessment on growth and inflation remained soft and this view was confirmed in the February inflation report. So, there was no indication at all that the BoE will be a front-runner in scaling back policy stimulation. This was the main reason why we didn’t see a case for a sustained rebound of sterling. In the Minutes of the March meeting, the BoE sounded a bit less convinced on its lowinflation call, but the global message hadn’t changed. Of course, the euro felt ongoing headwinds from the EMU budget woes and the tensions on the intra-EMU government bond markets. This issue continued/continues to be a negative factor for 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.
End February, the EUR/GBP pair regained the 0.8834/41 key resistance area. This break made the technical picture again Euro positive/sterling negative. The ongoing soft BoE talk (keeping the way open for more QE if necessary) finally ‘convinced’ markets that any interest support for sterling is still very far away. Other issues (risk for a hung Parliament, uncertainty on the UK budget) weighed also on the UK currency. The pair extensively tested the 0.9154 resistance area, but a break failed and some consolidation kicked in. Wednesday’s return action below the 0.9000 mark suggests that there is some further room for correction in this pair. MT, the previous resistance area (mid 0.88), is now an important. We don’t leave our LT sterling skeptical attitude yet, but short-term return action to the 0.8850 (or even the 0.8829/14 area= targets ST double to off 0.8982) might be on the cards.
