Dollar stays in the defensive even as equities sell off

Yesterday, global (currency) investors adapted positions further away from the dollar as markets scaled back US rate hike expectations after the Fed minutes on Wednesday. Core bond yields declined further, too. The USD decline slowed temporary in the US (amongst others due to low jobless claims). However, a sell-off on the US equity markets puts the dollar again under pressure. The dollar is near key support against the euro and the yen.

Overnight, Asian equities are also under pressure after the sell-off in the US yesterday evening. However, the losses are moderate given the decline in the US. Japan underperforms again, with the Nikkei dropping below the 14000 barrier. Remarkably, USD/JPY didn’t decline much further late yesterday and this morning, despite the equity sell-off. So, the 101.20/100.75 key support area remains intact for now. A similar reaction was seen in EUR/USD. The pair rallied just shy of the 1.39 big figure late in Europe yesterday, but the decline of the dollar halted there. The pair hovers in a tight range in the high 1.38 area in Asia this morning.

Today, the calendar in Europe is again very thin. In the US, the March PPI and the Michigan consumer confidence are interesting. The Michigan confidence in particular has potential to move the currency market in case of a big deviation from consensus. However, the focus of currency traders will be on the global equity indices and their impact on other markets, including the bond markets.

Of late, a decline in core bond yields was often more negative for the dollar than for the euro, even in case of a risk-off sentiment. The dollar apparently needs interest rate support to make any sustained gains. At the same time, the intra-EMU bond markets were hardly affected by temporary pockets of risk-off sentiment. This kept the ‘buy Europe carry trade’ perfectly on course. The question is whether/how long this process can continue with spreads and yields levels in the likes of Spain and Italy reaching absolute low levels. The jury is still out, but we keep a close eye on the intra-EMU spreads. If a more protected correction on the equity markets would trigger a correction on the intra-EMU spread markets, the picture for the euro might gradually change, too. For now, this is nothing more than a working hypothesis and not enough to row against the EUR/USD uptrend. However, it might be another factor supporting the view that it will be difficult for EUR/USD to succeed a protracted rally beyond 1.40. There will also come plenty of headlines from the G20 spring meeting. There will hints for the ECB to prevent the EMU from drifting into a too low inflation environment. However, we don’t expect the meeting to provide a game-changer for currency trading.

Profit taking in sterling as topside test in cable fails.

On Thursday, the BOE as expected left its policy rate and the amount of asset purchases unchanged. Aside from the BoE meeting, there was no important news from the UK. Sterling fell prey to technical profit taking after the recent rally. Cable tested offers just shy of the 1.6823 cycle top, but the break didn’t occur. Cable came off the highs, even as the dollar stayed under pressure across the board. Some profit taking on sterling longs and broad based euro strength also sparked a rebound in EUR/GBP.

Overnight, the euro remains well bid across the board; EUR/GBP is holding in a tight range in the 0.8270/90 area. Later today, only the UK February UK construction output will be published. The report will have no lasting impact on sterling trading.

Of late, the technical picture in the major sterling cross rates was mixed, but this week’s rebound brings sterling within reach of important resistance. Cable recently rebounded off the 1.6460 low and the 1.6823 cyclical top was almost reached yesterday. For now, this proves a too high hurdle short-term, even as the dollar remains under pressure across the board. We maintain the view that the top won’t be easy to break in a sustainable way, but broad dollar weakness might spoil the game. EUR/GBP drifted to the 0.8230 area earlier this week, but a real test of the 0.8200/0.8157 support area didn’t occur. The sterling momentum is constructive, but a break will probably be difficult as long as the euro remains well bid across the board.