On Friday, the high level political Stratego on the Greek rescue plan continued. All kinds of European stakeholders defended their ‘tactical’ position on the public forum. Greece wants lower financing costs and assistance from other EMU member States is seen necessary to achieve this goal. A lot of other European countries prefer a European solution, but Germany has heavily opposed to anything that could look like a bail-out. This stalemate continued to weigh on the single currency on Friday. The pair was traded in the 1.3620 area at the start of trading in Europe and drifted south for most of the day. There were no important eco data, but during the US trading hours another wave of save haven euro selling kicked in as India raised its policy rate. Investors fear that more tightening of monetary policy might be under way (in Asia, but also in developed countries) was a good enough reason to take some profit on the recent stock market rally. In the current environment, this kind of risk avers behaviour is almost by definition euro negative. So, EUR/USD reached an intraday low just shy of the 1.35 mark. From that point on, the correction on the US stock markets slowed and this prevented also further euro losses. EUR/USD closed the session at 1.3530, compared to 1. 3608 on Thursday evening.
Over the weekend, the political position-taking in the run-up to this week’s EU summit continued unabatedly, with several European politicians making high profile interviews is the weekend press. At least for now, none of the antagonists has left much room for a compromise yet. So, after all, the situation on the Greek issue has hardly changed from Friday. EUR/USD is holding close to Friday’s lows this morning. From a global market point of view, Asian stocks are in the red too this morning joining the correction in the US Friday. However, given the recent gains, the losses are not realty that big. So, this global stock market performance isn’t that much of an additional negative factor for the risk-sensitive euro, at least not for now.
Today, calendar is thin. In the US, the Chicago Fed National activity index will be published. In Europe, the EMU March consumer confidence is scheduled for release. Both data series are no market movers. Later this week, the calendar of eco data heats up with the IFO and the EMU PMI’s and several US data series including the durable orders on Wednesday. New info on the pace of the global economic recovery (and its implications for the timing of further steps of monetary tightening) is important for global markets and thus also for EUR/USD trading. However, after last week’s Fed commitment to keep rates low extended period of time, equity investors (especially in developed countries) apparently are not overly worried that the reflation traded should be left anytime soon. In this respect, we wouldn’t give too much weight to Friday’s moderate correction on the stock markets.
To be honest, most stock market indices are still within striking distance of the cyclical highs while EUR/USD is being traded close to its recent reaction low. So, the primary source of uncertainty for the single currency obviously doesn’t come from the stock markets, but from the political scene within the euro zone area. In this respect, opinion polls as the one that is published in today’s FT that a third of the Germans think Greece should be asked to leave the euro and 40% believing that that Germany should be better off outside the euro area, are not really a support for the single currency. Of course, a lot of this political uncertainty should already be priced in too. Nevertheless, as long as there is no indication how this deadlock might be solved, it is difficult to see even a ST technical rebound of the euro. The EU summit on Thursday and on Friday remains the next point of reference for the euro.
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 EUR/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 return to/beyond this barrier won’t be easy. On the downside, 1.3405 (62% retracement) is the first target on the EUR/USD charts. We maintain or sell-on-upticks approach.
It has become very boring, but also on Friday, there was again hardly any story to tell on USD/JPY trading. There was a brief up-tick at the start of the US trading hours on global dollar strength. However once again, there was no follow-through price action. Risk avers investor behavior on the back of the rate hike in India helped the yen to recoup its earlier losses. USD/JPY closed the session at 90.54, compared to a 90.39 close on Thursday.
Today, Japanese markets are closed.
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, the pair returned beyond the 90.00 area. This called off the downward alert. Last week’s Fed decision (no amendment to the extended period of time phrase) was no big help for our USD/JPY long call. On top of that, we have to admit that we are a bit disappointed that the USD/JPY cross rate could make much progress on the back of the recent strong stock market performance. Nevertheless, in case markets remain (cautiously) optimistic on the global recovery, we continue to see room for further USD/JPY gains. So, a buy-ondips approach is still preferred. The 92.15 reaction high is the next important target on the charts.
On Friday, the rebound of sterling on the back of better than expected UK budget data published on Thursday was already aborted. BoE’s Sentence saying that there was still a risk that Britain may suffer a double dip recession weighed on the UK currency. Quite aggressive stop-tripping in cable also had a negative impact on the performance of sterling against the euro. There were no important eco data on the UK eco calendar. EUR/GBP closed the session at 0.9012, compared to 0.8927 on Thursday.
Today, the UK eco calendar is again empty. Later this week, a long series of interesting UK eco data will be published. On top of that markets will take a very close look at the UK budget report on Wednesday. Of course, the EU debate on Greece and its impact on the single currency overall will have an impact on EUR/GBP trading, too. However, at least for now, we have the impression risk aversion is quite a negative factor for sterling too; even if the source of risk aversion is the Greek issue.
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. At the end of last week, the return action below the 0.9000 mark suggested that there was some further room for correction, but there were no follow-through losses. We maintain our LT sterling skeptical attitude. Short term, range trading in the 0.8834/0.9154 trading range is the preferred scenario. We don’t see a trigger to unlock the stalemate in hits cross rate anytime soon.
