On Tuesday, global markets were captured by a negative spiral. As was already the case a few times recently, the specific trigger to this kind of deterioration in sentiment was not that easy to pinpoint. Some blamed a downward revision of a leading indicator in China, others mentioned uncertainty on the EU banking stress tests or liquidity issues going into the expiration/refinancing of the 1-year ECB tender. The Spanish Economy Minister in an interview calling the ECB to be aware of the (financing) needs of Spanish banks was no help to ease global market nervousness. There was also a lot of market chatter on the rather big amount allotted in the ECB one week tender. Of course, there were also long-standing issues like the uncertainty on the pace of the US recovery and the negative assessment on economic policy as made by the BIS in its annual report on Monday. On the other hand, (cautiously) positive news (reasonably good EU sentiment indicators) was largely ignored. Whatever the origin of pessimism, the only way for risky assets was down. Over the previous days the euro sometimes managed to limit its losses even in case of deterioration in global sentiment. However, this time the negative storm was simply too strong for the euro to stay out of reach, especially as several sources of uncertainty were located within the euro zone area. EUR/USD was already under pressure in Asia and the sell-off accelerated at the start of trading in Europe. EUR/USD dropped below the 1.2200 mark, but from there no additional follow through losses. Nevertheless, the pair dropping below the 1.2254 support was a ST negative sign for this cross rate. Later in US trading, a sharp decline in US consumer reinforced the negative spiral. There release fueled the building up of risk averse trades as this was a bad omen for the pace of the US recovery going forward. This safe haven move triggered additional EUR/USD selling. The pair dropped to the 1.2152 area from where a moderate rebound kicked in, even as US equities remained under pressure. The pair closed the session at 1.2188 compared to 1.2277 on Monday. So, the euro had to cede some ground, but given the sell-off on the equity markets, the damage could have been much worse.
Today, investors will keep an eye on the EU inflation data and on the German labour market data. For the first series, a negative surprise could stoke deflation fears, which could be a slightly negative for the euro. Over the previous months, German labour market data used to come out on the strong/better side of expectations. This might also be the case for this month’s data. However, these data were recently largely ignored by the (currency) market. We don’t see a reason why this should be different this time. However, a key factor for European trading will be the amount of funds asked in the ECB 3-month tender.
A big amount might be an indication of stress on the European money markets and thus a negative factor for the euro. Nevertheless, the simple fact that the expiration of the 1-year tender will be out of the way might help to ease the tensions. Later in the session, the focus will turn to the ADP labour market report in the US. Its impact on global sentiment might also set the tone for EUR/USD trading. However, in the previous months, the ADP report as lost some of its influence on markets. Nevertheless, at this stage there might still be somewhat an asymmetrical risk, with markets of riskier assets reacting heftier in case of negative surprise. For the euro, the picture isn’t that straightforward, but for now we assume that there was till too many (European and global) risk factor pending. So, we expect the euro to stay in the defensive for now. Or will the dying up of end of quarter repositioning give the euro already some relief?
MT picture and technicals. Early May, EU policy makers came out with a big plan to restore stability in the EMU government bond markets. However, in a first reaction this decision didn’t help the euro. EUR/USD continued its downtrend and the pair finally dropped below the key 1.2331 level (2008 low), painting a massive double top formation on the charts. This was an outright negative signal from a technical point of view. The long-term fundamentals are also not in favour of the euro. Several ‘South’ European countries desperately need a weaker currency to restore competitiveness. There are also a lot of the credibility issues on European fiscal and monetary policy that are not yet solved. Last but not least, European policy makers several times indicated that they were happy with the current level of the euro as it will help to support growth. So, there is no reason for the euro to be overvalued, which is still the case. On the other side of the EUR/USD equation, the US recovery looked like being rather well on track. Recent data and last week’s Fed statement turned a bit more cautious on the pace of the recovery. Nevertheless, we hold on to our view that the relative growth prospects between the US and Europe are still in favour of the dollar versus the euro. We hold on to our long-term EUR/USD negative bias. The 1.1640 (2005 low) is the next high profile target on the EUR/USD charts.
End May, we turned temporary a bit softer on the pace of the euro decline as we felt that there was room for some consolidation after the steep losses since mid- April. The Hungarian crisis caused EUR/USD to set a new corrective low, but this was apparently some kind of short-term exhaustion move. Some consolidation/ correction on the long-standing euro decline kicked in. EUR/USD regained the 1.2150 area (previous reaction low area). This was an indication that pressure is easing short-term. Recently, we kept a wait-and-see approach and hoped that the correction would go to the 1.2455/1.2673 area (previous highs), where we would reconsider to reinstall EUR/USD short positions. EUR/USD traded temporary north of the 1.2455 area; but the gains could not be sustained. Recently, the dollar (as measured by the trade-weighted index) wasn’t in great shape either. The question is whether the euro should be a big beneficiary of this loss of momentum of the US currency. We still doubt whether this will be the case. So, EUR/USD is currently in a consolidation pattern. In a day to day perspective, the break below the 1.2254 support suggested a further loss of momentum. A slide below the 1.2150 area would again open the way for return action to the year lows. A sell-on-upticks approach, for return action lower in the established consolidation pattern, is still favoured. Nevertheless, until now to euro has still avoided panic selling.
On Tuesday, investors were looking for shelter and this kept the yen well bid. However, the move was not evenly spread over the day. A first selling wave occurred in Asia. The pair moved temporary sideways during the morning session in Europe. A second downleg started early in US trading and the move was reinforced after the publication of the US consumer confidence. USD/JPY set a new correction low at around 88.29. However, a real test of the year lows didn’t occur. The pair even regained a few ticks later in US trading despite ongoing selling pressure on the equity markets. The pair closed the session at 88.60, compared to 89.37 on Monday.
This morning, Asian stocks are still in negative territory with Japan underperforming, but the losses are less aggressive compared to yesterday morning. Japanese Manufacturing PMI showed a decline of the growth in the sector (down from 54.7 to 53.9). Labour cash earnings (-0.2% Y/Y) and housing starts (-4.6 % Y/Y) were also weaker than expected in May. USD/JPY is holding near to yesterday’s closing levels. Later today, global sentiment (eg the market reaction to the ECB 3-month tender and the ADP report) will set the tone for trading in this pair.
We have a LT positive bias for this cross rate as we still assume that the cyclical economic rebound in the US will support the dollar over time. Of course, recent US eco data and last week’s Fed statement don’t support our case and might have a negative impact on the USD/JPY cross rate short-term. However, at least for now we don’t change our long-term assessment on the US economic recovery yet (this week’s US eco data might be an import piece of information for this assessment). The ongoing need to fight deflation in Japan is a LT negative for the yen.
End May, the USD/JPY showed some signs of bottoming out. So, we reinstalled a cautious buy-on-dips approach, mostly on technical considerations. USD/JPY staged a rebound earlier this month, but the gains were not spectacular given the easing of global tensions. The pair reached a reaction high in the 92.89 area. Since then the pair drifted again cautiously lower and last week’s price action caused some additional cracks in the short-term picture as the pair dropped below the 89.81 support area. The subsequent break below the 88.95 support deteriorated the short-term picture further and caused us to stand aside on or tactical USD/JPY long position. The ST picture has become USD/JPY negative. The 87.95 year low is now the next high profile level on the charts. A sustained break below this level would be a high profile red alert for a technical point of view. However, we can’t image that a sharp move below this level wouldn’t spark a reaction (at least verbally) from the Japanese authorities. However, at least for now, we don’t see any compelling reason to row against this USD/JPY downtrend for now. Nevertheless, a failed attempt to break below the 88.00/87.95 support could be an indication that tensions are easing.
On Tuesday, sentiment on sterling remained fairly positive. The BoE minutes of the June session and a new series of hawkish comments from dissenter Sentence on Monday evening continued to support the UK currency. So, cable continued to outperform EUR/USD. EUR/GBP reached a new low in the 0.8067 area. The pair closed the session at 0.8091, compared to 0.8127 on Monday. Yesterday evening, some comments form an earlier speech of BoE’s Fisher put some different accents compared to hawkish comments from Sentence recently. Fisher said the BoE should not tighten monetary policy too soon. He also warned that the Bank needed to be sensitive to the risk of tightening policy prematurely, stifling the nascent recovery.
Overnight, the GFK consumer confidence declined slightly from -18 to -19. The Nationwide House prices were also weaker than expected (0.1% M/M). Later today, only the final figure of the Q1 business investment is on the agenda. The question for sterling trading is how much of the recent change in tone of the BoE on inflation is priced in at the current levels? It is always very dangerous to row against to strong trend. Nevertheless, we would be surprised to see some consolidation/profit taking on the recent steep gains of sterling against the euro.
Since mid March, sterling performed well against the euro. Global euro weakness was the name of the game. At the same time, sterling digested the uncertainty on the outcome of the UK elections and on the budget rather well. Finally, EUR/GBP dropped below the key 0.8400 support area (2009 low). Until now, we were not convinced that sterling should strengthen much further against the euro from current levels. The euro was/is under pressure as investors fear that the austerity measures to reduce the government deficits/debt will dampen growth, but we assumed that the situation in the UK was a bit similar. In addition, we thought that monetary policy in the UK would stay very accommodative (as will be the case in Europe) as the BoE would counterbalance a tighter fiscal policy with a loose monetary policy. After last week’s BoE minutes, this assessment of a tight fiscal policy and an ongoing extremely loose monetary policy is not that sure anymore. One can no longer exclude that inflation at some point will force the BoE to tightening monetary policy well ahead of the ECB. The jury is still out on this issue but after the June Minutes, the balance has tilted a more in favour of sterling.
Early June, we couldn’t ignore the high profile signal on the technical charts. The break below the key 0.8400 area was an indication that global negative sentiment toward the euro outweighed the potential doubts on sterling. So, we amended our short-term bias for EUR/GBP trading from neutral (range trading between 0.8400 and 0.8800) to negative. Even in such a scenario, we still expect any further losses in EUR/GBP to occur at a gradual pace. Mid June, the decline of EUR/GBP slowed. Nevertheless, the subsequent rebound was far from convincing, too. Last week, EUR/GBP started another down-leg and the pair finally dropped below the 0.8200 mark, further deteriorating to ST picture in this pair. Yesterday the pair came already close to the 0.8056 level (1st target double top of 0.8603). The trend in the pair is obviously still down. Nevertheless, in a day-to-day perspective, we wouldn’t be surprised to see some profit taking on EUR/GBP shorts
