Dollar stays on the defensive, but losses remained limted after the payrolls
On Friday, all eyes were on the US payrolls report and the currency market was no exception to this rule. EUR/USD hovered sideway in the 1.25 area going into the start of the US trading session. The dollar came already under pressure in the run-up to the release. The payrolls report came out on the weaker side of expectations (cf.. News). In line with the price action of late, this disappointing news from US caused additional dollar selling. EUR/USD jumped north of the 1.26 mark. However, the move stalled there. The details of the report were disappointing, but not really dramatic. So, the report was not enough a reason for investors to push EUR/USD for a test of the key 1.2673 resistance area. Even more, after the strong gains of the previous sessions and going into a long weekend in the US, some investors apparently decided to cash some profits on the recent EUR/USD rebound. So, the pair gave back most of the post-payrolls gains and closed the session at 1.2566 compared to 1.2527 on Thursday evening. So, after all, the payrolls were not able to give to currency market a clear signal.
Today, the calendar is thin. In the US traders enjoy a day off for the 4th of July holiday and no eco data are released. In Europe, the final release of the services PMI’s and the May EMU retail sales will be published, but most likely won’t bring marketmoving info. So, (currency) investors will continue to chew on the US payrolls and there meaning for currencies. Is it a sign that the US recovery is losing momentum in a worrisome way? Or will investor finally come to the conclusion that things could have been worse? The answer to this question will not only be important for currencies, but also for equity markets. In this respect, the question arises whether a further slide on the equity markets will continue to hurt the dollar was the case last week or whether the yen and, to a lesser extent also the dollar, will continue to fulfill their role as safe haven in case of rising stress on global markets. The jury is still out on this issue and we wouldn’t be surprised that markets will need time to sort this out (e.g. at least until the real start of the earnings season, mid July). In the meantime, we keep a close eye on the technical charts when looking for guidance.
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 seen not in favour of the euro. Several ‘South’ European countries need a weaker currency to restore competitiveness. There were also a lot of the credibility issues on European fiscal and monetary policy that were/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 supporting 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 the Fed statement of the June meeting turned also more cautious on the pace of the US recovery. So, the cyclical/interest rate balance turned less supportive to the US currency. This was also visible in the trade-weighted dollar. The index declined since early June and lost an important support level last week. The relative developments between the euro-zone and the US obviously are now less in favour of the dollar than a few months ago. Nevertheless, for now we don’t change our long-standing EUR/USD negative bias yet, even as we are well aware that a quick return to the year lows or to the 1.1640 support are far from evident in the near future.
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, but last week’s move of course changed the short-term picture as EUR/USD regained the 1.2455/90 resistance area. Nevertheless, the jury is still out whether the euro should become a big beneficiary of a loss of momentum in the US economy. The payrolls were not able to give the currency market a clear answer on this issue. On the other hand, in Europe, there are also still several big issues to be solved. For example, will the stress tests be able to remove to uncertainty on the strength of the European financial sector? For now, the downside in EUR/USD looks well protected. So, a test of the range top over the next days is very well possible, but at this stage we do not front-run on a break higher beyond this level. For that to happen markets probably need some kind of high profile event and it is far from sure that this will occur in the days to come. Short-term players who played the card of the euro correction/rebound might consider partial profit taking incase of return action to the 1.2673 range top.
On Friday, there was no big story to tell about USD/JPY. Investor uncertainty going into the US payrolls report kept the pair under pressure. There was some nervousness at the time of the release, but the report had no lasting impact on USD/JPY trading. The pair settled in the 87.50 area. Apparently, the losses on the equity markets after the payrolls were not big enough to spark another safe haven run to the yen. Investors were apparently also reluctant to push the pair again for a test of the year lows. USD/JPY closed the session at 87.75, even marginally higher compared to the 87.60 close on Thursday evening.
This morning, Asia stocks markets are mostly higher, Chinese markets underperforming. The Nikkei succeeds a cautious technical rebound after recent steep losses and is helping USD/JPY to move a few ticks higher. There were no important eco data in Japan this morning.
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 the June 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. Last week’s US payrolls report was not able to give a clear signal to assess the pace of the US economic recovery.
Looking at the technical picture, USD/JPY reached a reaction high in the 92.89 area early last month. Since then the pair drifted again lower. The break below the 88.95 support deteriorated the short-term picture and caused us to step aside on or tactical USD/JPY long bias. The ST picture had become USD/JPY negative and last week’s break below 87.95 (previous year low) reinforced the dollar negative picture. On Friday, the dollar managed to avoid further losses against the yen. However, for now, we don’t see any compelling reason to row against this USD/JPY downtrend. For the picture in this cross rate to become more positive again, we first need a clear signal that equities will be able to avoid a next down-leg. Looking at the fragile picture of the S&P, it is much too early to play already this card. In this context, we expect USD/JPY to hold close to the recent lows even as markets turn a bit more cautious on pushing the pair sharply lower due to the threat of (verbal) interventions from Japanese policy makers.
On Friday, EUR/GBP was locked in a very tight trading range roughly between 0.8250 and 0.8220 ahead of the US payrolls figure. The US payrolls came out (slightly) weaker than expected. EUR/USD extended its gains after the publication, but cable lagged this move. So, the EUR/GBP short-squeeze continued , too. From an economic point of view, there is no obvious reason why the dollar should decline more against the euro than against sterling due to a poor payrolls release. So, the move suggests that there were still stale GBP longs in the market that had to be scaled down after the recent rally of sterling. EUR/GBP reached intraday highs in the 0.8295 area. Later in the session, the global rebound of the euro slowed and EUR/GBP closed the session at 0.8269, compared to 0.8254 on Thursday evening.
Today, the UK calendar contains the services PMI. A small decline from 55.4 to 55.0 is expected. We assume that quite a sharp deviation from consensus is needed to have a lasting impact on EUR/GBP trading. Later this week sterling traders will watch out for the production data (Wednesday) and the trade balance figure on Friday. On Thursday, the BOE will hold its monthly meeting. However, any change in Bank’s policy is highly unlikely. The details on the debate within the MPC will only be available with the publication of the Minutes of the meeting later this month.
Since mid March, sterling performed well against the euro. Global euro weakness was the name of the game. 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 the June 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. Two weeks ago, 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). Early last week, 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.
