On Wednesday, the euro rebounded from Tuesday’s correction low as global market tensions eased. The move started in Asia, even as Asian stocks were still under pressure. The amount asked in the 3 month ECB tender was much lower than expected, easing fears on the health of the European financial sector. EUR/USD jumped almost one bigger figure on the announcement, notably from the 1.22 area to test offers just beyond the 1.23 mark. However, investors were still cautious going into the US trading hours and ahead of the eco releases. The ADP labour market report came out materially weaker than expected. Equity indices nosedived, but the damage for the euro was fairly limited and short-lived. The pair even recouped the post-ADP losses after the open of the US equity markets. However, regaining the 1.23 mark was a too high hurdle, especially as the rebound on the US stock market was very tepid, too. Later in the session, Moody’s said it was reviewing Spain’s ratings and that it may lower them by as much as two notches. This caused a blip on the EUR/USD charts, but once again the losses were not big. Nevertheless, with US equities slipping lower late in the session, the euro continued to drift south and closed the day at 1.2238, compared to 1.2188 on Tuesday evening. So, after all, while there is still uncertainty on a lot of issues inside, but also outside Europe, the euro yesterday held within the established trading barriers.
Overnight, rating agency Fitch said that renewed market volatility and European debts problems increased the risk for a recession. Once again the negative impact on the euro was limited. EUR/USD tested the 1.22 mark overnight, but the break didn’t occur yet. On the other hand, the Swiss frank this morning set a new high against the euro.
Today, the calendar is well filled on both side of the Atlantic. In Europe the final manufacturing PMI’s will be released. Markets will also keep an eye on the auction results from Spain and France. After yesterday’s announcement of Moody’s on the Spanish credit rating, the Spanish auction will be closely monitored. In the US initial claims, the pending homes sales and the ISM manufacturing are scheduled for release. Markets will be interested to see whether there are more worrisome signals on the outlook for the US economy. In theory, negative news and a further deterioration in global investor sentiment should be negative for the euro. However, over the previous day’s the euro often managed to limit the losses, especially in case of negative news from the US. So, it is not a law of physics that the euro should decline on negative news from the US. Tomorrow’s payrolls will be the key event to asses whether markets will stick to the ‘established’ trading paradigm.
However, with chances of an early US rate hike declining fast (some Fed members even keep open the possibility of further easing if necessary), the question is whether (or at least how much) support the dollar will continue to get from negative US news. For now, we continue to assume that (high profile) negative news and a further deterioration in global risk sentiment won’t be of any help for the euro. Nevertheless, we stay open-minded on the issue. In any case, one can not ignore that the euro has become less sensitive to negative news.
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, Tuesday’s break below the 1.2254 support suggested a further loss of momentum, but for now there a no follow-through losses. On the other hand, the 1.2150 support area was not broken. This leaves the picture in this cross rate rather neutral for now. A sell-on-upticks approach within the established trading pattern is still slightly favoured. A drop below the 1.2150 mark would open the way for a renewed test of the year lows.
On Wednesday USD/JPY hovered sideways in an extremely tight sideways range in the mid 88 area. The pair gained a few ticks after the ECB tender, but those gains were undone later in US trading (ADP, poor close on the US equity markets). USDJPY closed the session at 88.43, compared to 88.60 on Tuesday.
This morning, most sub-indices came out better than expected. The headline large manufacturing index improved from -14 to 1, the best reading in two years. Firms also expected to increase capital spending by 4.4%. Nevertheless, this positive report was not able to muster enthusiasm in the markets, as investors focused on the uncertain outlook and on the potential negative impact of the strength of the yen on Japanese corporate results. Asian stocks equity indices traded down. Despite the Tankan result Japan is again underperforming. A disappointing release of the Chinese PMI is also no help for global investor sentiment. So, the yen is again gaining ground this morning, but this is obviously not due to the good Tankan report. USD/JPY is changing hands within striking distance of the year low (87.95). The market reaction the Key US data today and tomorrow will decide whether a test/ break might be on the cards.
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. 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.
On Wednesday, the time was ripe for a correction on the recent steep decline of EUR/GBP. The euro was already slightly higher overall in Asia and early in Europe. There were no high profile UK eco data on the agenda. So, EUR/GBP moved already north of the 0.8100 mark early in European dealings. The announcement of the result of the ECB 3-month tender triggered a broad short-squeeze in the euro and this time EUR/GBP was no exception to the rule. EUR/GBP jumped higher and tested the 0.8180 area. BOE’s Posen in a speech kept a balanced approach in the recent BoE inflation debate. On the one hand, he didn’t agree with view of governor King over the extent to which inflation was the result of temporary factors. However, he indicated also that this was not a sufficient ground to tighten policy when there were strong downward risks. Later in the session, cable moved again more in step with EUR/USD. EUR/GBP reached another minor new high but basically the correction stalled. EUR/GBP closed the session at 0.8188, compared to 0.8091 on Tuesday.
Today, PMI for the manufacturing sector will be published. The market is expecting a moderate decline from 58.00 ot 57.5. We don’t have a strong view on the outcome of the series. I t will be interesting to see whether there is still room for further sterling gains in case of a strong figure. If not, it could be an indication that quite a lot of good news has been priced in. In a newspaper interview BoE’s Miles also indicated that the Bank hasn’t reach to point to at which tightening monetary policy is the right thing to do.
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. On Tuesday, the pair came already close to the 0.8056 level (1st target double top of 0.8603). Yesterday, we indicated that there was room for some profit taking on EUR/GBP shorts. Yesterday’s rebound was a nice move, but still hasn’t changed the overall picture. Sustained trading north of the 0.8200/37 area would be a first indication that the pressure is easing short-term. We look out whether this correction has some further to go.
