On Thursday, the euro showed remarkable strength given the level of stress seen in several other markets of riskier assets. There were several good reasons for the euro to come under pressure (Moody’s reviewing the Spanish credit rating, a poor manufacturing PMI in China and the subsequent decline on the equity markets), but this time the euro didn’t react. On the contrary, EUR/USD moved already sharply higher during the morning session. Market chatter linked the rebound of the euro to a successful Spanish 5-year auction. To be honest, we were not impressed by this analysis. The euro rebound started already before the action and the bid-cover ratio was far from impressive. On the other hand, the spreads of peripheral bond didn’t widen, a decent performance given the stress in other markets of risky assets. In additional, (short-term) yields in Europe are gradually moving higher and this move accelerated after the successful 3-monht ECB tender on Wednesday. At the same time, US yields are still at/close to the historical lows. So, the move might be partially euro strength, but we saw it in the first place as dollar weakness going in the to key US data. This thesis was also more or less confirmed by the decline in the dollar trade-weighted index. Whatever the explanation, EUR/USD broke beyond Wednesday’s highs in the 1.2300 area, triggering more stop-loss euro buying/dollar selling. The claims came out higher than expected. This was an ambiguous sign for EUR/USD traders. There was no instant reaction, but a few minutes later EUR/USD simply resumed its uptrend. Even more, EUR/USD continued to move north after the publication of a much weaker than expected ISM of the manufacturing sector (and subsequent dive of the equity markets). This can only be interpreted as dollar weakness due to poor US figures. The jury is still out whether this is a new trading paradigm. Nevertheless, the price action suggests that the era of euro bashing might be over, at least short-term. EUR/USD closed the session at 1.2527, quite a spectacular gain compared to the 1.2238 close on Wednesday evening.
Today, there is only one factor that matters for trading on all markets: the US payrolls report. As usual, this report might set the tone for the next move in most markets. However, for the currency market, the question is which trading paradigm markets will apply. Is risk aversion good or bad for the dollar? Recently most US eco data came out on the weak side of expectations.
So, a moderately weak figure (even slightly lower than the consensus) should not be a big surprise anymore. So, in case of no negative surprise, there might even be room for a rebound of equities and other riskier assets. In such a scenario, we expect the dollar recoup part of its recent losses. However, in case of a much weaker than expected figure, markets might elaborate on the theme of US weakness. In such a scenario, the dollar might stay under pressure overall and EUR/USD should ( at least temporary) joined this reversal of the trading paradigm on currency market. In such a scenario, quite a lot of long-term players might still have some repositioning (out of US dollars) to do.
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 were also not in favour of the euro. Several ‘South’ European countries desperately need a weaker currency to restore competitiveness. There were 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. However, recent US data disappointed and last week’s Fed statement turned also more cautious on the pace of the US recovery. Nevertheless, until now we held on to the view that the relative growth prospects between the US and Europe are still in favour of the dollar versus the euro. In that context, we maintained 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 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. 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 shorts. At first, the euro rebound developed only in a very gradual way. However, yesterday’s move of course changed the short-term picture as EUR/USD regained the 1.2455/90 resistance area. The jury is still out whether the euro should be a big beneficiary of a loss of momentum in the US economy. However, at least for now there is no reason to be in a hurry to fight this powerful correction. More dollar weakness in case of a poor payrolls figure could be an indication that the correction in EUR/USD (or even better the decline of the dollar) may have stronger legs than anticipate until now. We will review our strategy after the payrolls.
On Thursday, USD/JPY initially held a sideways trading range in the 88.10/88.60 trading range, despite a negative tone on the Asian and European equity markets. Japanese officials came out to warn on the negative impact of a strong yen on the Japanese recovery. However, the signal was clearly not strong enough and USD/JPY finally dropped below the key 87.95 barrier as soon as the US came in. A disappointing claims report triggered further stop-loss dollar selling. The pair reached a new year low and a similar reaction occurred on the back of poor US ISM of the manufacturing sector. However, contrary the ongoing decline of the dollar against the euro at that time, USD/JPY staged a moderate rebound later in the session, probably due to spill-over effects from EUR/JPY. USD/JPY closed the session at 87.60 down from 88.43 on Wednesday evening.
This morning, Asia stocks markets are mostly lower, with Japan and Taiwan the exception to the rule. Later today, the outcome of the payrolls will also be key for USD/JPY trading. In this cross rate, the risk paradigm will continue to do its job. Nevertheless, even in case of a poor US payrolls figure, the downside in USD/JPY might be a bit less easy, as Japanese authorities will raise their warnings on excessive yen strength. However, we don’t think that we are already at the point were currency interventions are a real option.
We had a LT positive bias for this cross rate as we still assumed that the cyclical economic rebound in the US will support the dollar over time. Recent US eco data and last week’s Fed statement didn’t support our case and obviously had a negative impact on the USD/JPY cross rate short-term. Until now, we didn’t change our long-term assessment on the US economic recovery yet. Nevertheless today’s US payrolls report will be an important factor in assessing the on the pace of the US economic recovery.
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 lower. The break below the 88.95 support deteriorated the shortterm picture and caused us to step aside on or tactical USD/JPY long bias. The ST picture had become USD/JPY negative and yesterday’s break below 87.95 (previous year low) reinforced the dollar negative picture. At least for now, we don’t see any compelling reason to row against this USD/JPY downtrend for now.
On Thursday, the short-squeeze in EUR/GBP continued. In the first place, the euro performed strong overall. Contrary to market behaviour over the previous months, the single currency was little affected be the slide on global equity markets. In a context of rising risk aversion, it is quite understandable that short-term players tried to lock in profits on sterling longs/EUR/GBP shorts. In additional, over the previous days there were also some comments for the dovish side within the BOE, indicating that Sentence’s call for higher rates is not the mainstream view within the BOE (yet). This was also a good reason scale back sterling longs. The UK PMI of the manufacturing sector came out perfectly in line with market expectations at 57.5. The impact on sterling trading was close to non-existent. So, EUR/GBP was seen in the 0.8180 area at the start of trading in Europe, but the pair trended north throughout the morning session and tested offers in the 0.8250 area around noon. From there, cable moved more or less in step with EUR/USD, (global dollar weakness) so the rebound in EUR/GBP slowed. EUR/GBP closed the session at 0.8254, compared to 0.8188 on Wednesday.
Today, on the Construction PMI is scheduled for release in the UK. This is no market mover. So, technical considerations and global market sentiment be the dominant factors for today’s trading in EUR/GBP. In the wake of the recent developments, we have the impression that sterling is now again more sensitive to risk aversion than the euro. In case of a poor payrolls report and a further decline on the equity markets, we wouldn’t be surprised to see EUR/USD outperforming cable again.
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). We were not convinced that sterling should strengthen much further against the euro from that level. The euro was/is under pressure as investors fear that the austerity measures to reduce the EU 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 combined with an ongoing extremely loose monetary policy is not that sure anymore. One should no longer exclude that inflation at some point will force the BoE to tightening monetary policy ahead of the ECB. This change in the BoE rhetoric gave sterling a boost. However, this factor looks like being priced in now.
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. 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. The pair came already close to the 0.8056 level (1st target double top of 0.8603). On Tuesday, we indicated that there might have become room for some profit taking on EUR/GBP shorts. The pair regaining the 0.8200 breakdown area was a first indication that the pressure is easing short-term. EUR/GBP is now again in the previous consolidation pattern between 0.8200 and 0.8400/25. For now, we assume that the correction might still go a bit further. However, a break of the topside of this range looks still difficult. Short-term we look to take profit an tactical longs and even reconsider shorts in case of return action to the 0.8400/25 area.
