On Thursday, EUR/USD traded range-bound in an order driven session devoid of important eco data or events. The pair was well bid in Asia, extending Wednesday’s rebound. The pair changed hands in the 1.33 area at the start of trading in Europe. However, the tide turned soon and the euro came under downward pressure without specific news to explain the turnaround. Trade was mainly order driven with few eco data on the calendar to guide the price action. European equities opened strong helped by decent Japanese GDP data and a strong Australian labour market report. However, equities couldn’t sustain these opening gains, which was apparently enough to start an intraday stop-tripping move in the EUR/USD cross rate. So, the pair dropped to the 1.32 area around European noon, when Fitch downgraded the credit rating of Ireland from A+ to BBB+. Remarkably, this couldn’t push the pair further south. This only confirmed the hypothesis of order driven trade more than anything else. US traders kept a close eye on the weekly jobless claims. The initial claims were in line with expectations; the continuing claims were better/lower than expected. Nevertheless, US bond yields and the dollar turned slightly lower after the release, as equities found also a better bid, helping EUR/USD to move away from the 1.32 big figure. Later on, the EUR/USD tested once more the downside strangely enough after Wall Street lost its strong opening gains, but later on short covering kicked in sending the pair towards a 1.3238 close which insignificantly lower than Wednesday when the pair closed at 1.3262. not really highly consistent from an economic point of view, supporting the hypothesis of order-driven trade.
Overnight, trading remained lackluster and sideways oriented with the EUR/USD pair quoted at about 1.3250 at the time of writing. Japanese eco data were a tad weaker than expected, but without impact for markets, while the Nikkei and most other Asian stocks trade mostly slightly negative, despite strong Chinese eco data, as a rate hike is expected in the weekend. However, all these factors didn’t affect the big picture overnight.
Today, the market calendar is a little bit more inspiring compared to the previous days. In Europe, only some second tier data will be released, but in the US, the October trade balance, the November import price and December Michigan consumer confidence will get more attention. The trade balance sometimes moves the market, but the interpretation of the result is difficult. If the trade deficit is smaller, it suggests that GDP growth might be stronger, but all depends of the driver of the smaller deficit. Is it more exports and more imports, it is usually dollar positive. Should the decline in the deficit be driven by imports declining faster than exports, it is less good news as it suggests slower domestic demand. On top of it, one should take into account the monthly volatility of the data. The Michigan consumer confidence is expected to show an improvement, but the weak payrolls report is a negative. The report might be of intraday importance, but as was the case for all of this week’s eco data, we don’t expect today’s releases to change the broader picture.
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 mid last week, the tensions on the European markets eased as ECB bond buying gave investors some comfort. This caused a short-squeeze in EUR/USD too. Recently, we advocated that the combination of more QE-2 and reasonably good US eco data could yield some support for the US dollar. Friday’s payrolls and the comments from Bernanke over the weekend didn’t confirm this view. On the other hand, earlier this week, the dollar gained some ground in step with higher US bond yields after the US budget agreement. So, in this respect the currency market hasn’t made a clear choice yet. At the start of this week, we changed our short-term bias for EUR/USD from negative to neutral. Euro sentiment is still fragile, but unless some high profile negative headlines on the EMU crisis resurface, the 1.2969 reaction low should provide decent support. Over time, a further rise in US bond yields might push the balance again in favour of the dollar. However, for now the jury is still out whether this theme will be able to provide enough ammunition for a new USD up-leg. Looking forward, the EU summit next week might again yield a lot of (negative?) market chatter on the EU institutional framework.
From a technical point of view, the MT picture is EUR/USD negative. The pair lost several key support levels, including the uptrend line from this year’s low (at today 1.3456). At the end of last week/early this week, the pair tried to regain this area, but at least for now the attempt didn’t succeed. Sustained trading north of this area would be an indication that the pressure is easing and that the rebound in EUR/USD might go somewhat further. In this respect, the 1.3698/1.3786 area (Previous range bottom/reaction high) is the next high profile resistance area. A sustained rebound beyond these levels will be difficult. We still favour selling EUR/USD into strength for return action lower in the range.
On Thursday, there was no big story driving USD/JPY trading. The pair ceded some ground early in Asia, probably only some technically-inspired profit taking following gains on in the previous two sessions. Indeed, the pair was unable to break above the 84.40 resistance area and that might have inspired the profit taking move. US yields came off a little, which is a dollar negative, as the sharp move higher in yields was clearly a driver for the pair in recent trading. However, downside remained well protected by these higher yields. USD/JPY returned to the 84.00 area twice in the US trading session, but really couldn’t make a come-back, which convinced traders that the upside was blocked and was followed by dollar selling. USD/JPY ultimately closed at 83.73 which compared to the previous close at 84.04.
This morning, trading is listless in the very tight 83.65 to 83.85 range. Japanese data were a tad weaker than expected, while Chinese trade data were strong. Japanese equities lose altitude, while Chinese equities spurt to good highs, but overall it all doesn’t affect trading.
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 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. Recently, we favoured to sell USD into strength, but that waited for a technical signal that the upward correction had run its course. This happened at the end of last week. The 84.40 area was tested several times and thus proved to be a strong resistance. So, 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 the previous days. Nevertheless, we don’t change tactics, but 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.
On Thursday, the EUR/GBP cross rate showed quite an erratic trading pattern in a tight range, but in the end the pair closed nearly unchanged compared to the previous session. The pair slipped south in step with the broader decline of the euro early in European dealings. There was some temporary positive reaction of sterling to the wider than expected UK trade deficit. For those who want to be optimists, both imports and exports were strong. EUR/GBP even touched an intra-day low in the 0.8372 area after the publication of the UK trade data. The BOE as expected left both the base rate and the amount of asset purchases unchanged and thus accordingly, the market fully ignored the decision. The pair settled in a tight sideways trading pattern, but overall euro weakness continued to weigh on this cross rate into the mid of the US trading session with an intra-day low at 0.83615. However, the market turned and the euro recouped all modest intra-day losses and EUR/GBP closed the session at 0.8395, compared to 0.8392 on Wednesday evening.
Today, the UK PPI data are scheduled for release. With the UK inflation hovering well above the BoE target zone, price data could in theory be ‘important’ for markets. However, we don’t expect these data to bring any high profile sign that could change the assessment of the BoE on the inflation (or better market perception of the BoE assessment). For now, markets assume that the BoE will continue to bring some kind of justification for the above target inflation readings. So, we expect the PPI report to be only of intra-day relevance for sterling trading, at best. Broader sentiment on the single currency and technical considerations will probably prevail.
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. At the end of last week, we indicated that some bottoming out might be on the cards and that there was room for a rebound in this cross rate as long as there was no flaring up in the European sovereign crisis. So, we installed a cautious buy-on-dips approach.This week’s price action showed that global sentiment on the single currency remains fragile. In addition, the UK currency didn’t trade that bad yesterday and on Wednesday. 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).
Full report: The pair dropped below the key 0.8532 support area
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