Dollar trading mixed despite global risk-off

On Monday, risky assets nosedived. Investors questioned the outlook for Chinese growth after mixed Chinese PMI’s. Tensions between Iran and Saudi Arabia were an additional source of uncertainty, as is the prospect of a lifting of the equity selling ban (in China). The reaction of the dollar to risk-off sentiment was not straightforward. USD/JPY dropped from the mid 120 area to touch an intraday low in the 118.70 area. EUR/USD rebounded temporary north of 1.09, but the rally stalled soon. Soft German CPI data capped the EUR/USD topside. The US manufacturing ISM declined further below 50. The USD reaction was remarkable. EUR/USD had already reversed a big part of the intra-day gains in early US dealings and the decline continued even after the poor US ISM. USD/JPY also stayed off the intraday lows. Low volumes may have played a role. Or is the dollar taken up a safe haven role? EUR/USD closed the session at 1.0831, as a test of the 1.08 failed. USD/JPY ended the day at 119.44.

Overnight, the sell-off of Chinese equities eased as the PBOC injected liquidity to the system via reverse repurchases operations. At the same time, the Chinese regulator indicated to be prepared to amend the circuit breakers on the equity markets which came into force yesterday. The government apparently bought equities following a weak start, but Chinese equities are sliding again lower. e also rumours of interventions to support Chinese equities. Asian equities struggle to prevent further losses, but there is no indication of a genuine rebound. The yuan was fixed somewhat higher. USD/CNY trades near 6.52, but the off shore CNH losing some further ground. The dollar stabilizes against the euro and the yen respectively at USD/JPY 119.45 and EUR/USD 1.0823.

Later today, the EMU CPI and the German labour data might affect EUR/USD trading. Yesterday’s low German CPI puts the risk to the downside for the EMU CPI. A soft EMU CPI might keep the debate on further ECB easing alive and hamper a potential rebound in EUR/USD. There are only car sales in the US, but with little market moving potential. Risk off sentiment in Asia is less aggressive than yesterday, but remains fragile. This might slow the decline of USD/JPY, but it is much too early to row against the tide. As was the case yesterday, the dollar is still fairly well bid against the euro this morning.

The real driver for EUR/USD trading is still far from clear. Interest rate differentials between the US and Europe hardly narrowed despite the risk-off sentiment.
Question is whether this will remain the case if the global risk-off trade persists or if US eco data signal more economic weakness. So, despite yesterday’s surprise EUR/USD decline we are cautious to install/add EUR/USD shorts at current levels. We look to sell the pair closer to the 1.10/1.11 area.

At the end of last year, EUR/USD settled in a sideways 1.08/1.10 range. The Fed confirmed that policy normalisation will be gradual, but the dots (4 hikes in 2016) were less dovish than expected and left US dollar well protected. It is still early days, but a binary market focus might continue to set the tone for USD trading. Sentiment on risk remains a first driver as investors are pondering the health of the Chinese (and global) economy. Global uncertainty might be moderately negative for the dollar, especially for USD/JPY. The negative impact on USD/EUR might be much more contained as the theme shouldn’t change the relative policy approach between the ECB and the FED. At same time, markets look out whether the US data support the Fed-guidance for 4 rate hikes in 2016. Friday’s US payrolls will be an important yardstick. In case of more disappointing US eco data and/or a deepening of the global risk-off trade, the dollar might prepare for less Fed rate hikes. Yesterday’s USD reaction was a bit strange, but for now we assume that the dollar will be in the defensive if sentiment on risk remains negative.

From a technical point of view, EUR/USD rebounded after the December ECB policy meeting, but failed to regain important resistance (previous range bottom/break down at 1.1087 and the 62% retracement from the October high at 1.1124). This area will be tough to break. Yesterday, EUR/USD dropped temporary below 1.0796 (07 Dec low) but closed slightly above 1.08. A sustained break below 1.0796 would improve the ST technical picture for the dollar. For now, we don’t preposition for such a move and maintain a neutral bias for EUR/USD. However yesterday’s price action indicates that the scenario of a downside break is more realistic than recently anticipated. The picture for USD/JPY turned negative as the pair dropped below 120 support. 118.07 (15 Oct low) and 116.18 (august spike) are next supports.

Sterling set new short-term lows

On Monday, sterling trading was guided by conflicting factors. Sterling started the new year on a weak footing due to global risk off sentiment. Cable dropped to the lowest level since April last year. EUR/GBP touched a 2-month high at 0.7424. The UK currency found its composure during the European session. The UK data were mixed. The manufacturing PMI dropped more than expected to 51.9, but UK lending data were strong, especially mortgage lending. Sterling rebounded against the dollar and the euro after the lending data. Technical factors were probably also in play. Later in the session, cable set another multi-month low on (selective) USD strength. The pair closed the session at 1.4716. EUR/GBP stabilised after the intra-day reversal. The pair ended the day 0.7346, well off the intraday top.

Today, only the UK construction PMI will be published. A slight rebound from 55.3 to 56.0 is expected. We don’t expect the report to be a big help for sterling even in case of a positive surprise. The focus for sterling trading is on global factors and on the Brexit debate. A sustained rebound of sterling will be difficult unless there is a real improvement/signs of progress in one of those to factors.
The technical picture of sterling against the dollar and the euro looks fragile.
Yesterday’s intraday price pattern suggests that the rebound of EUR/GBP might become a bit exhausted, but we want further confirmation. EUR/GBP 0.7424 is a first short-term resistance. Next resistance is seen at 0.7493 (Oct top).

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