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EU measures to support Greece fail to support the euro
Tue, Mar 16 2010, 08:31 GMT
On Monday, the
cross rate drifted south throughout most of the session. There was not really one specific factor responsible for this move. Receding appetite for risk was the most obvious explanation. Equity investors held back on taking additional long positions as several indices are close to important resistance levels. Investors kept a wait-and-see stance going into today’s Fed meeting. Nevertheless, the eco data weren’t that bad (European Q4 employment, New York Empire manufacturing and US industrial production). However, the data were again of very limited importance for global investor sentiment and thus were also not able to support EUR/USD. On the global currency market, there was also a lot of market chatter on rising tensions between the US and the China on the Chinese currency policy. The Obama administration is coming under pressure to label China as a currency manipulator in a report that the Treasury department will publish mid April. Such a labeling might over time pave the way for protectionist measures. At first sight this development is not really dollar positive, but as the threat for protectionism is seen a global factor of risk, it might be a short-term positive for the dollar, too. Last but not least, there was the evergreen of Greece and the EU ‘measures’ to support the country. However, on this issue, nothing had really changed yesterday. The Finance Ministers of the euro group again didn’t take the big step. The group repeated that there is a mechanism in place to support Greece financially if needed, but it again revealed no details. Coordinated (in essence multi-lateral) action can be activated if necessary, but everyone involved obviously hopes that it won’t be necessary to do so. There might be good political and tactical considerations for this approach. Nevertheless, it is no strong vote of confidence for the institutional framework that is supposed to ‘guarantee’ the solidity of the euro. So, in this respect it shouldn’t come as a big surprise that the euro slide accelerated later in the session as soon as became clear that no hard engagement on Greece would be agreed on. EUR/USD closed the session at 1.3677, compared to 1.3769 on Friday evening.
This morning, Asian stocks are little changed, awaiting the BOJ interest rate decision. EUR/USD is a few ticks higher compared to yesterday’s closing levels.
Today, in Europe the ZEW survey and the EMU CPI data are on the agenda. For the ZEW, drop from 45.1 to 43.5 is expected. However, we don’t expect this to be a big issue for the currency market. In the US, the housing starts and permits and the import prices are on the agenda. They are interesting, but most probably a very large deviation from the consensus is needed to spark a market reaction as all eyes will be on the FOMC meeting. With respect to the Fed meeting, the key question is whether the Fed will make any amendment to its commitment to keep rates at exceptionally low levels for a prolonged period of time.
Markets apparently tend to believe that it is still too early for the Fed to make another small step on the way to a more normal policy. It’s a finally balanced call, but we’re not that sure on this.
So we put the risk for the Fed to make again small step on the way to a less supportive monetary policy. Such a scenario would be dollar supportive, with the reaction on the stock markets holding to key for the amount of dollar gains. (In case of a stock market correction, the dollar gains could be rather outspoken). Greece will continue to occupy quite a big part of the financial headlines, too. The reaction to the Eurogroup ‘decision’ was muted, but we don’t expect the euro get much support from the way the EU is handling the Greek issue.
Global context.
For most of 2009, the improvement in global risk appetite, together with exceptionally low US interest rates, were good reasons for investors to hold back on safe haven dollar long positions. At the end of last year, there was growing evidence that the US economy was gaining traction. This fuelled market speculation that US interest rates might be raised at some point and triggered a USD shortcovering move. From that point, we were looking for clues that the US economy was/is improving at a pace strong enough for the Fed to scale down policy stimulation in a not-that-distant future. We installed a cyclically inspired sell-on-upticks approach in EUR/USD. Since mid January, the Greek saga (and other intra-EMU tensions) became the most influential factor for EUR/USD trading, rather than the global cyclical picture and its policy implications. EUR/USD breaking below important technical support levels was a strong technical signal, even as it was due to outright euro weakness. US data series very cautiously continued to go in our way of a cyclical USD rebound. Nevertheless, market uncertainty on European government finances and its impact on global investor risk appetite remained the key driver for currency trading. The EU support for Greece (without any details) to some extent eased the tensions on higher-yielding EMU government bonds, but uncertainty still prevails. The Greek issue highlighted also the weak points of the EMU framework. This continues to weigh on the euro. The Fed discount rate hike mid February, even as it is in the first place a technical step on the way to normalization of the money markets, still might be seen as supportive to our cyclical USD rebound. So, we continue to feel comfortable with our long term EUR/USD negative bias. Today’s Fed policy meeting will be the next point of reference for the case of a cyclical USD rebound.
In a short-term perspective,
has entered a sideways consolidation pattern. Quite a lot of bad news has apparently been priced in for the euro. We don’t expect the recent (moderately positive) developments on Greece to be the trigger for a sustained euro rebound. EUR/USD traders have reached a point where they are looking for a new trading theme. In such a context, we keep a close eye on the technical charts. For now, we hold on to our view that a sustained EUR/USD rebound beyond the 1.3850 resistance area won’t be easy (cf infra), but keep an open mind the see how a potential new trading theme (if it would be found) will affect trading.
. Since December EUR/USD faced quite a forceful correction on the longstanding rally from March. The pair lost several important support levels, including the longstanding uptrend line, indicating that the EUR/USD bull-run has run its course and that EUR/USD trading entered a new era. The trend in this pair is obvious and any more pronounced rebound is still seen an opportunity to sell the single currency. For now, the 1.3850 area (previous high) is the first barrier on the topside. Recent price action reinforced our feeling that a (swift) return to/beyond this barrier won’t be easy. 1.3405 (62% retracement) is the first target on the EUR/USD charts. LT the 1.2886 April low might gradually come into the picture.
, EUR/USD settled in a ST consolidation pattern. The pair regaining the MT downtrend line since December even might be seen as ST positive for this pair. Nevertheless, for now, we don’t feel any need to change our standing EUR/USD negative bias. This remains a sell-on-upticks market. Nevertheless, short-term some more sideways price action in the 1.3443/1.3850 trading range might continue.
On Monday, the price moves in the
cross rate were initially blocked in a very tight range between 90.55 and 90.80. Investors were a bit less inclined to take risk, but any gains at first were capped by market speculation on additional BOJ steps to easy monetary policy. There was a brief dip in step with the price action on US stock markets, but after all the price moves were very limited. Stop-tripping in EUR/JPY through the crosses, might have played a role, too. USD/JPY closed the session at 90.53, hardly changed from the 90.56 close on Friday evening.
Overnight, USD/JPY continued to lose moderate ground again. Markets expect the BOJ to take some additional measures to support the economy. The pressure from the government to do something is quite pressing. However, at this stage, markets obviously are not convinced that the BOJ steps will be that strong they will have a profound (negative) impact on the yen.
Recently, we had a cautiously positive bias for USD/JPY, as we saw USD/JPY longs as a good trade to play the global recovery story.
The loss of momentum on global (equity) markets since the end of January didn’t really support our case and last week’s break below the key 88.55 support obliged us to draw our conclusions and (temporary) step aside.
Nevertheless, with the global recovery story still on track and with the
BOJ under pressure to do something on deflation, we don’t feel any need to be engaged in yen long exposure at this stage. After the rejected test of the downside two weeks ago the pair returned beyond the 90.00 area. This called of the downward alert. In case markets remain (cautiously) optimistic on the global recovery, we continue to see room for further USD/JPY gains. So, a
. The 92.15 reaction high is the next important target on the charts. The Fed taking another small step toward to exit of its ultra-loose monetary policy might be USD/JPY supportive, too. Of course, USD/JPY traders should take a close eye at the technical charts of the major equity indices, with the S&P close to the recent year highs.
On Monday,
trading experienced again a rollercoaster ride. During the morning trade, the UK currency lost again ground across the board, even against the euro which didn’t give a strong impression either. The ‘usual’ suspects for sterling selling where again at work: opinion polls raising the chances on a hung parliament, rather poor eco data (right move house prices) and soft BoE speak. BoE‘s Barker said she didn’t expect a double dip, but indicated that is was possible to have another quarter when GDP falls. This could hardly be seen as good news for the UK economy and for sterling. So, EUR/GBP returned beyond Friday’s highs, but a real test of the key 0.9135/0.9154 once again didn’t occur. On the contrary, later in the session, the global slide in the euro also caused EUR/GBP to return part of the early gains. The pair closed the session at 0.9083, compared to 0.9053 on Friday evening.
Today, the UK calendar is almost empty. Some press headlines on Europe warning the UK for doing too little to fix its budget continues to weigh on the UK currency.
During the August/mid October period, sterling showed additional losses as the BoE increased the amount of asset purchases. This policy was maintained going into the end of the year, but the UK currency entered calmer waters. Recently, there were some very cautious signs that the UK economy is leaving recessionary territory, too. From a monetary policy point of view, the question is whether the UK economy has already reached the point where sterling could become a cyclical play. Early February, the BoE shifted as expected, to a sit-and-wait approach. However, its assessment on growth and inflation remains soft and this view was confirmed in the February inflation report. So, we don’t have any indication that the BoE will be a front-runner in scaling back policy stimulation when compared to the Fed or the ECB. This was the main reason why we didn’t see a case for a sustained rebound of sterling. Of course, the euro was haunted by the EMU budget woes and the tensions on the intra-EMU government bond markets. This issue continued to weigh on the EUR/GBP pair, too. Nevertheless, we held/hold on to our assessment that EUR/GBP should be far less sensitive to this issue compared to EUR/USD.
In January, the picture for
was negative as the pair dropped below the medium term support area (0.8834). At the end of January, the slide in EUR/GBP eased and the pair even staged a rebound. Two tests of the 0.8834 neckline were rejected, but finally the break succeeded. The ongoing BoE talk on the possibility of more QE ‘convinced’ markets that any interest support for sterling is still very far away. Other issues (risk for a hung Parliament) only deteriorated the fate of sterling. The rebreak of the 0.8834/41 area materially improved the picture for EUR/GBP. After the test of the 0.9154 resistance, some consolidation kicked in. Nevertheless, we don’t expect any sustained sterling rebound anytime soon. We maintain a buy-ondips approach. The 0.9150/54 is the first high profile mark on the charts. 0.9240 is the next medium term target.