KBC Market Research Desk
KBC Bank
On Monday, the USD rally slowed. USD held close to the recent highs in a session devoid of important news. Risk sentiment was constructive, but the impact on the dollar wasn’t that obvious. EUR/USD traded sideways in a 1.0860/1.0900 range. A good EMU PMI helped to block the downside in EUR/USD. USD/JPY initially didn’t profit from the equity rally, but finally rebounded as core/US bond yields turned north later. USD/JPY closed the session at 104.18 (from 103.80). The 104.64 correction top remained intact.
Overnight, Asian indices trade narrowly mixed, despite a good close in the US. Japan outperforms as the yen remains relatively weak north of USD/JPY 104.
The trade-weighted dollar holds near a 7 month top. The US currency is still supported by gradually rising expectations for a Fed rate hike. Markets currently attach a probability of more than 70 % to a December rate hike. The rise of the dollar also weighs on the yuan. The off-shore yuan is setting new lows. USD/CNY (on-shore yuan) trades at 6.7760, the weakest level for the yuan since September 2010. The global moves again have only limited impact on EUR/USD with the pair holding in the 1.0880 area.
Today, French business confidence (102) and the German IFO business confidence (109.6) are expected to have stabilized in October. Yesterday, the German PMI was strong following a decline in September, but the IFO jumped already sharply in September. An upward surprise is possible. Even if so, the reaction of the euro should be guarded. Mario Draghi speaks in Berlin on stability, equity and monetary policy. He will unlikely give strong hints on policy a few days after the ECB meeting. In the US, October consumer confidence is expected to have dropped to 101 from 104.1, a post crisis high. A decline looks more likely, but a less than expected setback /upward surprise can weigh on core bonds and support the dollar. Yesterday, the dollar rebound slowed (temporary?), but there was no real correction or profit taking. So, for now yesterday’s consolidation was a pause in an established trend. Markets continue to play the policy divergence beteen the Fed and the ECB after the ECB press conference. December Fed rate hike expecations put a solid floor for the US dollar. The ECB is expected to maintain a loose policy beyond March 2017, capping the topside of the euro. The dollar rally won’t continue forever, but for now interest rate support causes by default USD buying. There is no reason to row against the USD positive tide, especially not in EUR/USD.
From a technical point of view, EUR/USD finally dropped below 1.0952/13 support. The break is a further USD positive and opens the way to next intermediate support (1.0822/1.0711). USD/JPY struggles to break north of 104.32/64. A break would paint a double bottom formation on the charts with targets in the 108/109 area. We stay cautious on sustained USD/JPY gains beyond the 104.32/65 resistance especially as global volatility/uncertainty intensifies. A new test of the recent highs looks to be in store.
Sterling: consolidation continues
On Monday, trading in the UK currency was order driven and technical in nature, as eco data were ignored. . The CBI data were mixed. Businesses see a rise in external competitiveness due to the weaker pound. There were also tentative signs of an improvement in investment intentions, but October orders disappointed. EUR/GBP held a tight sideways range around the 0.89 big figure The pair closed the session 0.8992 (from 0.8900). Cable closed the day at 1.2238 (from 1.2234).
Today, the UK calendar is empty, but BoE’s Carney appears before the House of Lords Economic Committee. Markets will look for clues on the BoE’s short-term policy intentions. If the BoE governor turns a bit more neutral on the timing of further easing, it might be slightly supportive for sterling in a daily perspective.
Political comments on the Brexit diminished allowing Sterling to enter calmer waters last week. This might continue short term. The UK currency even rebounded slightly as markets assume that more Parliamentary involvement reduce the risk of a hard Brexit. However, we don’t expect this rebound to go far. We look to sell sterling on more pronounced up-ticks. EUR/GBP 0.8725 remains a key reference.
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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