KBC Market Research Desk
KBC Bank
On Friday, global market were still in risk-off modus for most of the day as markets still focused on the decline of the oil price. This weighed on the dollar. The Michigan consumer confidence was again very strong (lower energy) and temporary slowed the decline of the dollar. However, oil and US equities stayed under pressure preventing any meaningful rebound of the US currency. EUR/USD closed the session at 1.2462 (versus 1.2411 on Thursday). USD/JPY ended the week at 118.75 (versus 118.65 on Thursday). Fitch downgrading of France to AA from AA+ had no noticeable impact on the single currency.
Overnight, Asian equities opened deep in the red, but are off the lows. Markets follow the sell-off in the US on Friday. However, oil tries to avoid further losses and so does the dollar. Japanese Prime Minister Abe’s Coalition secured a two-thirds majority at the parliamentary elections, but the outcome was reached with a record low turnout. Even so, the Japanese Prime minister can continue its reflationary policy. The BOJ Tankan report shows a mixed picture across different sectors. USD/JPY dropped to the 117.80 area early the session, but rebounded. The pair returned near Friday’s closing levels in the 118.80 area. EUR/USD opened in the 1.2480 area, but the dollar also rebounded against the single currency. The pair is trading in the 1.2445 area. The yuan continues to drift lower even as the PBOC set again a slightly higher mid-point for its currency.
Later today, there are few eco data releases in Europe. The currency market ignored the French rating downgrade by Fitch after the close of the US markets on Friday. In the US, the Empire manufacturing survey, the industrial production data and the NAHB housing market index will be published. We expect strong/stronger than expected results. However, will they affect USD trading? The focus will remain on oil, on equities and on declining core bond yields. Markets will also look forward to the FOMC meeting on Wednesday. We continue to look out whether the negative influence from lower oil prices on the dollar and on US equities declines. If so, it could help the USD dollar. The jury is still out, but a more constructive reaction of the dollar to strong eco data should be logical in the run-up to the FOMC meeting. Of course, we are well aware that the market developed a different reaction function recently.
Strategy. Over the previous days, the decline in the oil price capped the topside of the dollar. Even so, we maintain our view that the 1.25/1.26 area should offer strong resistance for the single currency. We maintain a cautious sell-on upticks strategy even as further decline of equities might also temporary block the downside in EUR/USD. USD/JPY still shows an indecisive trading pattern. The pair is holding above last week’s low (117.44), but we’re not yet fully convinced that it marks the start of a new up-leg. The re-election of Abe is in theory negative for the yen (confirming Abenomics) but global risk-aversion might continue to cap the topside of USD/JPY. We hold a neutral bias for USD/JPY trading going into the FOMC meeting.
EUR/GBP hovering near 0.79 pivot
On Friday, the risk-off climate left its traces on EUR/GBP as well. The pair traded around 0.7885 in the Asian session, but surged higher from the onset of European trading, more or less in line with EUR/USD. The pair rapidly filled offers north of 0.79. Construction output data are no big market mover, but their weakness (lowest for over a year in October) certainly didn’t help any comeback of sterling. GBP/USD traded stable in the 1.5720 area.
This morning, the UK rightmove house prices were materially weaker than expected. However, EUR/GBP and cable are again driven by global factors. Sterling is trading slightly weaker against the dollar and the euro. Later today, the CBI industrial trends will be published. A stable figure at 3 (which is a decent level) is expected. However, this report is usually no market move for sterling trading. So, for EUR/GBP more directionless trading, the 0.7950/0.7850 area can be expected.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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