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EUR hammered on contagion fears
On Tuesday, at first it looked as if EUR/USD traders would again experience a rather calm trading session. The single currency lost some ground off from the Asian highs. At the start of European trading, there was again a lot of market talk on the risk of contagion as spreads of countries like Portugal and Spain continued to widen. It was also visible in the equity markets that the investors were picking up the theme of contagion with indices of the likes of Spain underperforming. However, at first the negative impact on the euro was not really that big, with the EUR/USD cross rate holding close to mid 1.33 area. However, the tensions rose after a poor auction of short-term Italian government paper. Sentiment on riskier assets soared and the euro got another hit. EUR/USD dropped below the 1.33 mark. However, even at that time, the decline still developed in an orderly way. Strong US data (Richmond Fed survey and consumer confidence) temporary eased global tensions. However, this calm was very short-lived. S&P cut the credit rating of Greece to junk and lowered the rating of Portugal by two notches to A-. This move caused panic on almost all markets and triggered the usual safe haven trades. The euro was hammered. Investors looking for shelter bought the dollar and the yen. EUR/USD dropped below the year lows and closed the session at 1.3175, a loss of more than two big figures compared to the Monday close at 1.3383.
Overnight, EU policy markets including President Van Rompuy tried to bring some calm to the markets as he said that negations on Greece’s debt are on track that there is no question of a restructuring. The EU President put forward the date of May 10 as a possible timing to activate the rescue package. However, if the disintegration on European markets would continue to progress at the speed of the last 24 hours this might be (much) too late. The red alert is on and a clear, unequivocal and concrete plan to put the money on the table is urgently needed. Otherwise, the point of no return might have been passed at the time of the approval of the plan. Such a scenario might further undermine the case of the single currency, too. To be honest, at least for now, the decline of the euro still develops in a rather orderly way. Given the stress on the intra-EMU government bond markets and the lack of political engagement to tackle the problem in profound way, the damage for the single currency could have been even worse. Germany recently indicated that the risk of destabilizing the euro would be an important factor for the country to support a rescue package. Question is whether yesterday’s acceleration in the decline of the euro is bringing Germany closer to drop its ‘obstruction’ to a swift implementation of the Greek rescue plan. Overnight in Asia, the EUR/USD cross rate set a now corrective low around 1.3150.
Today, the Greek/European debt woes will continue to dominate to market headlines. The key issue remains whether there will come a convincing signal from the European political community that they will take decisive action to tackle the issue right now. If the market doesn’t get this signal anytime soon and if the political bickering in the implementation of the plan continues, the risk for a more disorderly price action on European markets would rise and the euro might come under further pressure. Regarding the data, the German Inflation data are interesting, but currently the (currency) market is focusing on other issues. The FOMC meeting has also market moving potential. Recently, the Fed indicated that it didn’t intend to change its commitment to keep rates low for an extended period of time. So, we don’t expect his commitment to be changed already at this meeting. Nevertheless, they might change their assessment on the economy. Recently, there was also market speculation that the Fed was considering to take steps to reduce its balance sheet. However, it is far from sure that this issue will be addressed in today’s communiqué. So, the basic assumption is that the Fed won’t bring much news for markets, but there is an outside risk that the communiqué will be slightly less dovish than expect. If so, this would be dollar supportive. So, given the ongoing tensions in Europe and expectations for the Fed, there is no reason at all to fight the EUR/USD downtrend.
Looking at the technical charts, two attempts of the EUR/USD cross rate to move away from the 1.3268/83 support area failed. The pair returned lower in the 1.3268/1.3850 consolidation pattern. The bottom of the range was extensively tested/temporary broken at the end of last week, but no sustained break occurred (yet). However, the short-term downward alert is not called off yet. The pair was never able to regain a first important resistance level. After yesterday’s down-leg, the pair is again below the 1.3282 neckline and the previous low in the 1.32 area. This makes the short-term picture again outright negative. The targets of this configuration are seen at 1.2972 and 1.2872. 1.2886 marks the April 2009 low. So, the 1.2900 area is the next high profile support area on the charts. We maintain a LT EUR/USD negative bias.
On Tuesday, the deterioration in global investor sentiment toward riskier assets was the obvious driver for USD/JPY trading. The pair drifted cautiously lower off from the 94 area, touched just before the open of the European markets. The slide on the (European) stock markets, the poor Italian auction and the S&P downgrade of Greece and Portugal hammered global investor sentiment. The yen showed that it is still a safe haven providing shelter for stormy weather on financial markets. So, USD/JPY temporary dropped below the 93.00 mark after news on the downgrades of Portugal and Greece. The pair closed the session at 93.26, compared to 93.96 on Monday. This was a nice gain for the yen, but it was not really spectacular.
This morning, Asian stocks are in the red, too, but except for the Japanese market, the damage is not that spectacular. So, the yen didn’t make any further gains against the dollar. Aside from the risk trade, the USD/JPY cross rate remains rather sensitive to any change in the Fed’s assessment on the economy or on monetary policy. No big change is expected, but any indications that the Fed might come closer to any steps of monetary tightening (from whatever nature) might be USD/JPY supportive.
Since early April, the performance of the USD against the yen was not really convincing. We have a LT USD/JPY positive bias, but were waiting for a sign that the recent correction has run its course. Our LT USD/JPY positive perception is based on our global cyclical USD long bias and on the need of fighting Japanese deflation. Last week, the support at around 92.00 was under heavy pressure, but an attempt to break lower was rejected. The subsequent rebound called off the ST downward alert, but at first there was no extension of the rebound. Friday’s break beyond the 93.80 resistance area improved the short-term picture in this pair. After yesterday’s correction, the pair is again below this level. The stock market reaction to the corporate earnings and global sentiment to risk will continue to be an important factor for USD/JPY trading going forward. Nevertheless, unless the situation in Europe would completely derail, we have the impression that the downside in this pair is rather well protected. At the end of last week, we reinstalled a cautious buy-on-dips approach. Given the global uncertainty, one should not be in a hurry to add to USD/JPY long exposure. However, we have the impression that underlying sentiment isn’t that bad. A sustained break above the 94.78 high would further improve the picture for USD/JPY bulls.
On Tuesday, the EUR/GBP cross rate was only moderately affected by the global sell-off of the single currency. The inability of the pair to clear the 0.8600 support earlier this week apparently triggered a profit taking move on EUR/GBP shorts and this move was even extended a bit further yesterday morning. The UK data this time failed to spark a positive surprise and the EUR/GBP cross rate came even close to the 0.87 mark. Later in the session, EUR/GBP joined the broader euro sell-off and the pair closed the session near the intraday lows at 0.8631, compared to 0.8658.
Today, the UK calendar is empty. So, global factors will continue to set to tone for EUR/GBP trading. Global euro weakness is obviously a negative for the EUR/GBP cross rate, too. However sterling remains also vulnerable to global tensions in the financial universe. So, even in case of further EUR/USD losses, it is highly probable that EUR/GBP will only partially join this broader euro decline.
Recently sterling outperformed the euro. This was in the first place due to global euro weakness. However, the global positive investor sentiment on risk also caused potential (sterling) negative factors to have only a limited impact on ST trading. Over the previous weeks, we advocated the view that sustained sterling gains beyond the recent EUR/GBP lows would not be easy as several strong support levels were lining up in the EUR/GBP cross rate: 0.8705 (reaction low), 0.8660 area and 0.8603 reaction low. We also expected the risk for a hung Parliament to make investors a bit cautious on sterling going into the UK Parliamentary elections. However, the first two lines of defense have already been broken. The last one is still within striking distance. As we don’t expect a forceful recovery of the euro anytime soon, the risk of a break below this key support area remains a possibility. A sustained break below the 0.8603 MT low would signal further downside potential for the cross rate. It would force us to amend our short-term sterling negative bias (stop loss). In case of a break, the 0.8400 area (2009 low) would become the next high profile target on the charts.
Published on Wed, Apr 28 2010, 08:02 GMT