Currencies: USD well bid, but no important technical levels are broken (yet)

On Friday, EUR/USD basically kept a sideways trading pattern. In technical trading, the single currency tried to gain some ground at the open of the European markets. However, the move ran into resistance soon in the 1.3280 area. With no important eco data on the agenda in Europe, the cross rate settled in the mid 1.32 area going into US trading hours. The US eco data (trade balance and Michigan consumer confidence) came out stronger than expected. This supported the dollar overall.

EUR/USD touched an intraday low in the  1.3180 area after the publication of the Michigan consumer confidence. However, from there  the euro staged a remarkable rebound, even as US bond yields continued to move higher later in the session. This confirms the view that, trade in markets in general and in EUR/USD in particular, has in first place become order driven. The link with individual news events and/or developments on other markets is not always that easy to find. Equities remained well bid throughout the US trading session. However, this was not enough a reason for more EUR/USD gains. EUR/USD closed the session at 1.3226, not that much changed from the 1.3239 close on Thursday evening.


Today, the calendar of eco data is very thin on both sides of the Atlantic. So markets will have to look for other drivers. The dollar is again will bid in Asia this morning, supported by a further rise in US bond yields late on Friday and this morning. On the euro side of the story, markets will look forward to the Irish vote on the €85B EU rescue package on Wednesday. In addition, there will also be a lot of market chatter in the run-up to the EU summit on Thursday and on Friday. This meeting is expected to take additional decisions on the EU safety network that will start in 2013. However, one might also expect a lot of rumours/speculation on other, temporary measures to address the tensions in the EMU bond markets (will the €750B package be raised or not? etc). Probably, there won’t be any hardly news before the start of the meeting, but the lingering uncertainty on the EMU institutional framework and the division among European policy makers is most often no positive environment for the single currency. So, we assume that the EUR/USD will continue to fight an uphill battle. In the US there are a lot of eco data on the calendar this week and the Fed will meet to decide on monetary policy on Tuesday. After last months ‘big move’, Bernanke and Co will probably bring no important news for markets.


Global context: since early November, EUR/USD is captured in a negative trend. The trade-weighted dollar reached a new correction low (75.63) after the November Fed meeting with EUR/USD reaching a top in the 1.4280 area.

However, the negative impact of QE-2 on the US dollar faded soon. The tensions in peripheral Europe came again to the forefront. EUR/USD was ripe for a more pronounced correction. Contagion fears kept the  euro under pressure. The pair reached a correction low at 1.2969 last week. Since early December, the tensions on the European markets eased as ECB bond buying gave investors some comfort.

This caused a temporary short-squeeze in EUR/USD too. However, the move had no strong legs either. The rebound ran into resistance in the 1.3440 area. Regarding the USD side of the story, the signals were mixed of late of late. Nevertheless, the US budget agreement and the subsequent rise in US bond yields are apparently seen as USD supportive, at least in the short-term.

From a  technical point of view,  the MT picture is EUR/USD negative. The pair lost several key support levels, including the 1.3334 level (previous high) and the uptrend line from this year’s low (currently 1.3470 area). An attempt to regain this area didn’t succeed, keeping the short-term bias in this pair negative. We still favour selling EUR/USD into strength for return action lower in the range. A retest of the 1.2969 might be on the cards going into the EU summit later this week.

On Friday, USD/JPY trading showed two faces. The pair drifted lower in Asian and early US trading. (Speculation on) a further tightening of monetary policy in China might have played a role. The pair reached an intraday low in the 83.45 area. However, later in the session, the dollar found a better bid overall. This move accelerated later in the session as the US eco data (trade balance/Michigan consumer confidence) came out stronger than expected. USD/JPY close the session at 83.95, compared to 83.76 on Thursday.

This morning, there were no important eco data on the calendar in Japan. Asian stocks are showing broad-based gains as China only raised the reserve requirement ratio (and not the policy rate). USD/JPY is extending Friday’s rebound.

After the Mid-September interventions, USD/JPY trading for some time became a tactical game between the BOJ and the market. Investors felt comfortable with yen long positions (USD/JPY shorts) as Japan was considered to have little room of maneuver to execute a strategy of aggressive interventions to stop the rise of the yen.

Indeed, the debate in the G20 was about excess countries taking steps to artificially lower the value of their currency. However, finally the global  decline of the dollar slowed and USD/JPY developed a  bottoming out process.  The rise in US bond yields became an important driver behind this move. This improved the ST
technical picture in the pair. We didn’t/don’t expect a major U-turn in the USD/JPY cross rate. Nevertheless, there was apparently room for a repositioning in a unidirectional positioned USD short/yen long market. Two weeks ago, 84.40 area was tested several times but no break occurred. We reinstall a cautious sell-on-upticks strategy for return action to the 80 area. To be honest, USD/JPY held up reasonably well over of late. We keep stop-loss protection in the 84.50 area to shield USD/JPY short positions against the potential fall-out of a further rise in US bond yields. Sustained trading beyond this barrier would open the way for a retest of the 85.93 postintervention high.


On Friday,  sterling continued to trade strong against the euro. Global euro selling during the morning session in Europe pushed the pair to an intraday low in the 0.8356 area. However; once again, a real test of the key 0.8334 support didn’t occur.

The UK PPI data were close to expectations and had no impact on trading. Later in the session, cable moved more in step with EUR/USD, so EUR/GBP settled in a sideways trading pattern and closed the  session at 0.8395, compared to 0.8368 compared to 0.8395 on Thursday.

This morning, the Rightmove house prices came out at a soft -3.0% M/M 0.4% Y/Y. Later today, only the input PPI data are on the agenda. We don’t expect this series to have a lasting impact on sterling trading. This morning in Asia, the pair held close to the 0.8350 mark, but the euro tries to regain some ground going into the start of the European trading session. We expect global issues and technical considerations to set the tone for EUR/GBP trading today.

Global context:  from late August till end October, EUR/GBP rebounded from the 0.8200 area to reach a recovery high of 0.8942 on October 25. Investors started to discount higher chances that the BoE would join the Fed and enlarge its program of asset purchases. The harsh UK budgetary measures were seen as a potential drag on UK growth and this could be a good reason for the BoE to maintain an accommodative approach. This kept sterling under pressure. However, stronger eco data (especially the first estimate of the Q3 GDP) torpedoed the hopes for additional BoE policy accommodation short-term and helped  sterling to regain ground. Rising tensions in the euro zone were also a good excuse to scale back euro long exposure in
general and EUR/GBP exposure in particular. The pair dropped below the key 0.8532 support area and reached a correction low in the 0.8335 area mid last week.

From there, the pair joined the broader rebound of the euro.  Longer-term, we don’t expect a major comeback of sterling (yet). The debate on more QE is delayed, but probably not closed. The impact of the budgetary measures on growth has still to materialize. We still assume that the BoE will lag the ECB on
the way to policy normalization. Two week’s ago, the pair showed some tentative signs of bottoming. So,  we installed a cautious buy-on-dips approach. Last week’s price action showed that global  sentiment on the single currency remains fragile. In addition, the UK currency didn’t trade that bad either. So, the day-to-day
momentum doesn’t go our way. For now we hold on to our tactics. Stop-loss protection in the 0.8335 area (correction low) remains warranted to limit the damage in case of renewed intra-EMU tensions (or of further sterling strength).


US: trade deficit falls back to lowest level since January 
In October, the US trade deficit narrowed sharply, while only a slight decline was expected. The deficit shrank from a revised $44.6 billion to $38.7 billion, while a shortage of $43.8B billion was expected. The details show that exports rose sharply (by 3.2% M/M), while imports fell slightly (by 0.5% M/M). Excluding transportation, the trade deficit dropped from $22.9B to $19.6B.  In the second and third quarter, net-exports posted a big drag on US GDP growth, but this figure, also the real trade deficit was much smaller,  is an encouraging sign that net-exports might post a (significant) positive contribution to GDP in the fourth quarter.

In December, University of Michigan consumer confidence improved further, after already a significant increase in November. According to the preliminary estimate, the headline index rose from 71.6 to 74.2, while the consensus was looking for only a slight increase (to 72.5). The details show that both economic conditions (85.7 from 82.1) and the economic outlook (66.8 from 64.8) improved despite the weak payrolls
report. The improvement in sentiment might be due to the start of the Christmas shopping season, but also QE2 and the Congress moving forward on the tax bill might have brightened sentiment.

EMU: Italy and France are unable to track Germany 
In October,  Italian industrial production dropped for the second consecutive month, although the  decline was far less pronounced than in September. On a monthly basis, industrial production fell by 0.1% M/M; while the consensus was looking for an increase by 0.7% M/M. The details show that weakness was based in mining & quarrying (-5.9% M/M), while manufacturing production remained flat and electricity and gas rose by 1.9% M/M. Also in France, industrial production disappointed in October. While production was still marginally up in September, it fell back by 0.8% M/M in October. This outcome confirms again the strength of the German economy compared to its neighbours.
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Full report: Currencies: USD well bid, but no important technical levels are broken (yet)