On Tuesday, sentiment on global markets changed for the worse after the relief rally in the wake of last week’s better than expected US data. According to the financial newswires, the reason for this flaring up of risk aversion came from an article in the WSJ on the some shortcomings of the stress tests of the European banking sector in measuring the sector’s sovereign risk. A report of the German banking association that the 10 biggest banks may need €105 in additional capital was also seen a negative factor for global sentiment on risk (and on Europe). To be honest, we are bit surprised to see those factors becoming again such a dominant factor for global trading and for EUR/USD at this juncture. Nevertheless, the deterioration in investor sentiment spilled also over to the (peripheral) European bond markets, reinforcing the negative spiral that had already captured the single currency. The German July factory orders, the only important data release of the day, was also weaker than expected. This was no help for the euro, but it didn’t make things worse. The runaway from the euro due to global risk aversion simply continued during the US trading hours. EUR/USD closed the session almost at the intra-day lows at 1.2682, compared to 1.2876 on Monday evening.
Today, the calendar of eco data is again rather thin, with only some second tier data on the agenda in the US and in Europe. However, yesterday’s price action showed that this is no guarantee for calm price action on markets, on the contrary. Even after last week’s better than expected US data, investors are apparently not yet convinced that the current soft spot in the US global economy will indeed end with stronger growth in 2011, as Bernanke suggested in Jackson Hole. In addition, for one reason or another, fears on the European banking sector and on European sovereign risk are back in play, too. We are a bit puzzled why these factors have again come to the forefront right now. Did the WSJ article really change the picture in such a profound way? Nevertheless, this lingering uncertainty weighs on global market sentiment, which is still the most important driver for EUR/USD trading. We don’t yet exaggerate the importance of yesterday’s price moves. Nevertheless, at least for now it looks that the upside in EUR/USD will be difficult as long as global sentiment remains as fragile as it is now. In the current environment, euro traders should keep a close eye at today’s Portuguese bond auction.
MT picture and technicals. From early June to early August, EUR/USD succeeded a remarkable rebound. This move was partly a technical correction on the steep sell-off of the euro due the European government debt crisis. In addition, during June and July, European eco data came out reasonably good. At the same time, US data suggested a cooling down in the pace of the recovery in the US. Interest rate differentials between the US and Europe (Germany) turned sharply to the disadvantage of the US currency. EUR/USD reached a recovery high at 1.3334 early August, going into the Fed August meeting. At this meeting, Bernanke and Co admitted the slowdown in US growth and kept the door open for additional monetary stimulus (QE). Intrinsically, one would expect this to be a USD negative message from the Fed. However, the (currency) market played another card after the Fed meeting. Global risk aversion came again to the forefront and uncertainty on the global recovery was still seen a USD supportive factor, even as the negative surprises came from the US rather than from Europe. Two weeks ago, the EUR/USD decline slowed/bottomed and the euro even succeeded a cautious rebound in the wake of a temporary easing of global tensions. However, this move looks like being over after yesterday’s brutal sell-off.
From a technical point of view, EUR/USD last week put in place a ST double bottom formation with neckline at 1.2780, improving the ST picture in this pair. Early this week, the pair came close to the 1.2923 resistance area (mid August high). However, the test was rejected and this was enough a reason for quite a sharp correction. The pair dropping again below the 1.2780 neckline is a first warning signal that the day-to-day momentum is waning. Two weeks ago, we turned a bit more positive on EUR/USD even as we were well aware that the global context would remain shaky. Yesterday, we indicated that at least partial stop-loss protection on EUR/USD longs was warranted. After yesterday’s losses, we can not but put the risks in this pair again on the downside, even as we didn’t see the exact trigger for this flaring up of euro-skepticism.
At first sight, the BOJ policy decision was a complete non-event, also for yen trading. The BOJ didn’t take any additional measures yet, but vowed to take additional action when needed. So, in a first reaction (currency) traders turned to business a usual. Equity markets came under pressure and this supported the yen. The Japanese currency gained quite some ground against the likes of the Aussie dollar and the euro. USD/JPY drifted lower too, but the losses were less pronounced. Finally, the pair tested the multi-year lows reached on August the 24th. However, investors obviously were reluctant to really challenge the resilience of the BOJ/Mof tandem. The pair reached a minor multi-year low at 83.52, but a real break didn’t occur. The pair closed the session at 83.83, compared to 84.21. So, even as the BOJ is ‘criticized’ for not taking bold enough action, the markets didn’t go really for the big break yet.
This morning, there was a long list of Japanese data, with among others the machine orders coming out much stronger than expected, but this was not really able to change the negative sentiment on Japanese/Asian markets. The yen reached another multi-year low at 83.35, despite Fin Min Noda openly saying the government will take decisive measures including interventions when needed.
Recently, we that indicated that a change in the global picture (for the better) was a prerequisite to unlock the stalemate in USD/JPY trading and to see some sustained weakening of the yen. After the last week’s US manufacturing ISM and payrolls release it looked that something might have changed. During August, investors had prepared themselves ever more for a protracted slowdown in US growth (and maybe even globally). The risk for such a scenario has declined after last week’s US data. In this context, one would expect that there might be room for a further unwinding of risk aversion trades that were set up last month. However, USD/JPY didn’t profit from last week’s strong US data and this week’s return of risk aversion again closed the door for the upward pressure on the yen to ease. So, for now the stalemate in USD/JPY trading persists. So, markets will continue to debate on the possibility of yen interventions. We assume that the BOJ won’t use interventions as long as the rise of the yen develops at the rather gradual pace as it did in the recent past. They might probably take action for example in case of a brisk gain of e.g. two yen or in case of a drop below the 80.00 mark.
On Tuesday, sentiment on the UK currency was subject of quite some conflicting factors. At the start of trading, the UK currency was under pressure against the yen and the dollar due to higher global risk aversion, but it looked as if the currency would be able to even gain some ground against the euro as the intra-EMU tensions resurfaced and potential weak spots of the European banking sector came back into the spotlights. EUR/GBP reached an intraday low at 0.8289 around noon. However, later in the session, sterling came under additional pressure and even reversed the morning losses in Europe as a survey from a major bank showed a steep decline in UK consumer inflation expectations from the previous quarter. This report was seen as supporting the case of the doves within the BoE. However, late in Europe and further out in the US, the global decline of the euro dragged the EUR/GBP cross rate lower, too. The pair also closed the session near the intra-day lows at 0.8258, compared to 0.8365 on Monday evening.
Today, the Halifax house prices, the production data and the NIESR August GDP estimate are on the agenda. Recently, sterling was punished on the back of some weaker than expected data, but yesterday’s price action shows that the euro isn’t in good shape either. So, technical considerations might be quite important for today’s price action.
Since mid July, sterling had a good run against the euro. At the early August policy meeting, the BoE maintained a balanced approach. Despite current high inflation, the BoE still sees inflation returning slightly below target once temporary factors are worked out. Dissenter Sentance got no support for his call for a rate increase. However, this rather soft message didn’t prevent a gradual rise of sterling against the euro during the month of August. In the second half of the month, the move was supported by some encouraging UK eco data. However, the pair was gradually nearing the key 0.8066 support area (year low). We hold on to our view that high profile news is needed (from Europe or from the UK) for the pair to clear the 0.8066/00 area. At this stage, we don’t see this trigger.
Recently, we advocated that EUR/GBP had entered a consolidation pattern after recent sterling gains/euro slide and that the downside in the pair could become better protected. So, we installed a cautious buy-on-dips approach. Last week, EUR/GBP succeeded a nice move higher. This move was both due to global euro strength but also mirrored investor disappointment on some poor UK eco data of late. On Monday, the pair tried to regain the 0.8363 resistance (10 August high), but as was the case for EUR/USD, the test of this upside resistance was rejected. Yesterday, we advocated profit-taking on the recent EUR/GBP rebound. Medium term, we assume more sideways trading in this cross rate. In a day-to-day perspective we look out to what extent this global euro correction will continue to affect EUR/GBP. We still look out to reinstall longs incase of a further correction to the bottom of the range. 0.8143/0.8067 area.
