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FX: Euro sell-off continues
Thu, Jan 21 2010, 08:19 GMT
On Wednesday, the slide in
continued and the drivers were not different from the previous sessions. The Greek budgetary problems were still the talk of the town and there was also additional fall-out on other European countries as the credit spreads of the likes (as Spain and Portugal) were again pushed wider. However, all of this was simply a good excuse to try to trip the next stop loss level. Sentiment on markets can change very quickly, but at this stage it looks as if there is hardly any news that is able to stop the euro sell-off. A rebound on the stock market (Tuesday afternoon) was not able to help the euro. On the other hand, yesterday’s correction on the equity markets was seen a reason to get rid of euro long positions due to risk aversion (even while at that time the yen failed to make any progress on the dollar). Despite the recent euro losses against the dollar, French PM Fillon reiterated that the exchange rate of the dollar against the euro was a destabilizing factor for the French economy. So, one might assume that at least some people in Europe are not really that unhappy with some side-effects of the Greek budgetary woes. Of course, there are policy makers from all kinds of institutions (and with different interests) commenting on the potential impact of the Greek issue. The Bundesbank, for example, is probably not that happy with the current course of events. Board Member Fabritius said that if Greece does not sort out its budgetary problems quickly, bail-out talk will take on its own dynamic and risks setting a dangerous precedent which could damage the euro. Policy makers speaking openly on a spreading of the bail-out speculation and on a danger for the euro is of course no help for the single currency. To conclude, for now the self-reinforcing spiral of euro selling continues. EUR/USD closed the session at 1.4106, quite an impressive loss compared to the 1.4288 close on Tuesday evening.
This morning, the market focus was on the Chinese GDP data. The Chinese economy grew strong 10.7 Y/Y in the fourth quarter of last year, which is fuelling market speculation that China will have to take additional steps to tighten monetary conditions. This is seen a supportive factor for the dollar and, of course it is another good reason to sell the euro. So, EUR/USD reached a new correction low this morning on the Chinese GDP data. To be honest the pace of the decline was slower than what we got used to over the previous session. Of course, it is still early days…
Today,
the calendar contains the EMU PMI’s. Usually they have at best a limited impact on trading. We don’t have any reason to take a different view from the consensus, but we would not be surprised if markets would try to push the euro further south in case of a weaker than expected figure. In the US, the jobless claims, the housing prices, the Philadelphia Fed survey and the leading indicators are on the agenda. However, the budgetary problems of the European member states and its potential impact on the euro will remain the key factor for EUR/USD trading. We are a bit surprised that markets/financial newswires didn’t give more attention to the comments of Buba’s Fabritius as he openly addressed the potential negative consequence for the euro zone and the euro. It is always difficult to predict at which point a stop-loss move will stop or at least take a pause. The market no longer reacting to headlines that are intrinsically negative (for the euro) might be an indication. We start to look out for such signals.
Global context.
The swings in risk appetite were the key factor for trading on currency markets since March of 2009. The improvement in global risk appetite, together with exceptionally low US interest rates, both were a good reason for investors to hold back on safe haven dollar long positions, even more as the US dollar became a funding currency for setting up carry trades. However, the power of this trading paradigm faded at the end of last year. Amongst other evidence, the better than expected US payrolls report published early December fuelled market speculation that the era of close-to-zero US interest rates might not last till eternity. Markets contemplating that the Fed might reduce policy stimulation sooner than expected triggered a USD short-covering move. Euro negative headlines (Greece) reinforced the EUR/USD correction. EUR/USD dropped from levels above 1.51 at the end of November to reach a correction low in the 1.4220 area in the second half of December. Some consolidation kicked in. From that point we were looking for clues whether 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. The softer than expected December US payrolls report published early this month pulled some cold water on the hopes for a quicker than expected rebound and cooled down expectations for the Fed to raise rates anytime soon. This was the reason why we kept a cyclically inspired sell-onupticks approach in EUR/USD, but why we advocated not to front-turn on a break below this level. We were a bit surprised that the Greece saga is having such an impact on EUR/USD as it is becoming much more influential than the global cyclical picture and its policy implications. Nevertheless, one should not ignore the strong technical signal.
the (technical) charts,
EUR/USD last month faced quite a forceful correction on the longstanding rally from March. The pair lost several important support levels, including the longstanding uptrend line. The drop below these levels was a strong indication that the EUR/USD bull-run has run its course and that EUR/USD trading is entering a new era. We started the new year with a sell-on-upticks approach for EUR/USD aiming for return action to the bottom of the 1.4626/1.4220 range bottom. The break below this range bottom triggered a new EUR/USD downleg, making the picture for the pair outright negative. The 1.3748 June reaction low is the next high profile target/support level on the charts. There is no reason to fight the current strong downtrend, but we have impression that sell-off might slow, at least temporary. Short-term players can still look to add/sell to EUR/USD shorts in case of return action to the previous range bottom, which is now a first obvious resistance.
On Wednesday, the
held up rather well against the yen. The pair was hit quite hard at the start of European trading, but the pair soon found a bottom in the 90.80 area. This level gave decent downside protection despite the deterioration in global stock market sentiment. The pair hardly reacted to the US housing data. Even more, despite the poor equity sentiment in the US, a short-squeeze forced the pair back above the 91.00 mark. USD/JPY closed the session at 91.24, little changed from the 91.15 close on Tuesday. However, given the nervous sentiment in several other markets, this should be considered a strong performance of the dollar and a disappointment from a yen point of view.
This morning, Asian stocks show a mixed picture in the wake of the Chinese Q4 GDP data. However, the fear anticipation on additional monetary tightening in China obviously is seen as a supportive factor to the US dollar, especially against the yen. So, the pair is trading higher in Asia this morning.
reached a correction low in the 84.83 area at the end of November. During the month of December, the pair performed quite a remarkable rebound. Improved USD/JPY sentiment after the better than expected US payrolls early December was enough a reason to take profit/scale down USD/JPY short exposure. End December, the pair even temporary regained the 92.50 resistance area. The new Japanese Fin Min softening its tone on the yen added to the USD/JPY supportive picture, but the early January the payrolls blocked the rebound. In a medium term perspective, the December USD/JPY rebound called off the MT downtrend of the US dollar against the yen. Over the previous two weeks, the USD/JPY rebound shifted into a lower gear. We advocated setting up USD/JPY long positions in case of return action to the 90.78 neckline. In a broader perspective, we especially see USD/JPY longs as a good trade to play the global recovery story. Last week’s correction on global equity markets didn’t really support our case. However as we hold on to our global positive eco view short-term, we didn’t change tactics. We stick to our USD/JPY positive bias. We look for the USD/JPY pair to return to the 93.78 range top. A sustained drop below the 90.00 area would be an indication that global sentiment is turning more negative.
On Wednesday, the ascent of sterling against the euro was extended. EUR/GBP spiked lower in Asian trading, testing the 0.8700 mark. This move occurred in step with the broader EUR/USD sell-off on the back of the break below the key 1.4250/20 area. The EUR/GBP sell-off slowed temporary. EUR/GBP even regained a few ticks in the run-up to the UK labour market data and the Minutes of the previous meeting. The UK labour market data were better than expected as the claims declined by 15.2K, while a decline of only 4.6K was expected. In the Minutes, we didn’t read much new market-relevant info. The pair returned to the 0.8700 area after the labour market data. Initially, the there were no follow-through gains of sterling against the euro, but a new wave of global euro selling later in the session finally hammered the pair through the 0.8700 support. Greece was still said to be a good reason for additional euro selling. EUR/GBP closed the session at 0.8658 compared to 0.8732 on Tuesday.
Today, the UK Public Finance data, the money supply figures and the CBI quarterly industrial trends are on the agenda. We maintain our assessment from yesterday morning. Those data usually have only a limited impact on sterling trading, but in the current environment, a UK positive figure might spark a new attempt to push the EUR/GBP pair lower. We keep a close eye on CBI industrial trends data. We don’t feel any need to blow against the wind. Nevertheless, it would also be very interesting if EUR/GBP would not react to sterling positive news, or even more, if EUR/GBP would regain ground on UK negative news (e.g negative UK budget data). That could be an indication that the euro storm would be easing. However, there is no obvious pointer that we have already at that point. Nevertheless, we stay alert.
During the August/mid October period, sterling showed additional losses against the euro as the BoE extended its policy of quantitative easing through a rise in its program of asset purchases. This policy was maintained going into the end of the year, but the UK currency entered calmer waters. EUR/GBP settled in a 0.8830/0.9154 sideways trading pattern. Recently, there were some cautious signs that the UK economy is leaving recessionary territory, too. From a market point of view, the question is whether the UK economy has already reached the point where sterling could become some kind of a recovery play. Until now, we considered it is too early to conclude that recent signs of improvement will be enough for the BoE to scale down policy stimulation (or raise interest rates) in the foreseeable future. We also didn’t see any signs yet that the BoE will be more proactive in scaling back exceptional policy measures/policy stimulation compared with the ECB (or the Fed). Of course, this week’s sharp rise in the UK CPI complicated this view. The February BoE policy meeting (when a new inflation report will be available) will be the next point of reference for BoE policy.
We started the year with a neutral bias for this pair with range trading in the established 0.8834/0.9155 preferred. Recent euro weakness due to worries on the Greek budgetary situation, has overthrown this strategy. The pair dropped below several key support levels, forcing us to leave our longstanding EUR/GBP positive (de facto sterling cautious) attitude. The short trend is obviously euro negative and there is no good reason to row against the tide right now. Bashing the euro apparently is the path of least resistance. Whether one should become outright positive on sterling in this respect is only of secondary importance at this stage.