Dollar Slightly Lower On Resurfacing Credit Woes

Daily Forex Fundamentals | Written by KBC Bank | Jul 10 08 07:43 GMT |

Sunrise Market Commentary
* US Treasuries rally and curve steepens on crumbling equities
In absence of eco data or other events, Treasuries looked to equities that sold off heavily on more unsettling news about the financials. So, later in the session Treasuries rallied and the curve steepened. Today, the calendar is busier, but we fear it will again be equities that will decide the direction. Technical pictures Treasuries improved.
* ECB's Draghi says 'upward tendency in financial inflation expectations has halted'
European bonds yesterday had a rather constructive session, as the Bund confirmed the recent break higher above the neckline of a double bottom formation and gained further ground. Given the still elevated inflation rates and the volatility in oil prices, it may however be premature to expect much more gains, especially at the short end of the curve.
* Dollar slightly lower on resurfacing credit woes
The dollar lost moderate ground yesterday on resurfacing credit concerns and risk aversion. However, the losses were again only of intra-day significance. The broader picture remains unchanged with the major (USD) cross rates still locked within the established ranges

The Sunrise Headlines

* US equities hit the skids and posted heavy losses on more bad news about the financial sector, closing down 2% and more. Financials (-5.2%), IT (-3.2%) and consumer discretionary (-2.7%) underperformers. Asian equities trade weak, but not exceptionally weak overnight.
* Fitch puts Merrill on negative credit watch. Merrill considers the sale of its stake in Bloomberg and/or BlackRock, to offset of its Q2 losses.
* Wachovia names new CEO and expects a steeper-than-expected 2.6-to-2.8 billion $ loss in Q2 due mortgage and legal problems.
* Fortis plans to oust CEO Votron, according to newspaper. Board meets tomorrow.
* Fannie Mae & Freddie Mac shares drop again sharply on worries about the need for massive capital injection. Is some government intervention imminent?
* Crude oil closed virtually unchanged yesterday (136.05 $) as an intra-day rally was reversed. A drawback in crude inventories was unable to bring sustainable support. Little change overnight.
* BoE rate decision & ECB and Fed speakers highlights of the calendar today

Currencies: Dollar Slightly Lower On Resurfacing Credit Woes

On Wednesday, the dollar ceded ground against the single currency. However, once again the price action in EUR/USD (and most other major cross rates) was limited, especially when compared to the sharp swings recorded in other markets. The news headlines on Iran testing missiles triggered a brief up-tick in EUR/USD early in the session (even if the reaction in oil was quite moderate) but the gains could not be sustained. Later in the session resurfacing credit concerns (Fitch putting Merrill on rating watch negative, amongst other things) again set the tone for trading and at least for now this kind of news is considered as (slightly) dollar negative, even if the performance of the financial sector in Europe recently was no better as compared to the US. So, EUR/USD trended gradually higher through-out US trading and closed the session close to the intraday highs at 1.5743 (compared to 1.5670 on Wednesday). However, in a longer term perspective, no important technical levels even came within reach.

Today, the European calendar only contains some second tier data. In the US the claims are on the agenda while Mr. Bernanke and Paulson testify on financial market regulation before a House Committee. Bernanke already addressed this item earlier this week, but his appearance still deserves traders' attention.

Already for some time, we have a neutral bias on EUR/USD and assume the pair to extend its sideways trading in the wide 1.6020 to 1.5285 range. The eco fundamentals in the US and Europe are not that much different and both the ECB and the Fed are in a similar deadlock. High inflation prevents both central banks to support their ailing economies and this joined inability to act is also mirrored in the EUR/USD price action. Themes like rising (or declining) oil prices or credit related headlines have some impact on the intraday price action, but at the end of the day, nither the dollar nor the euro is able to take advantage of the current situation.

Technically, EUR/USD tested the 1.5842 area (previous reaction high) last week. However a break could not be sustained and after the (softer) ECB press conference, EUR/USD fell back in the longstanding sideways range. The short-term momentum is still slightly euro positive and the single currency still gets the benefit of the doubt in times of renewed market stress. However, given the deteriorating eco situation in Europe, we doubt whether EUR/USD will be able to regain enough momentum to really challenge/break above the key resistance levels at 1.5909 (last week high) and 1.6020 (all-time high). Oil, and to a lesser extent stocks, (credit related headlines) will set the tone for EUR/USD trading.

EUR/USD: slightly higher, but within established barriers

Support stands at 1.5708 (Reaction low), at 1.5668 (Daily envelope), at 1.5648 (Boll Midline), at 1.5611 (Week low), and at 1.5576 (MT breakup hourly), at 1.5537/27 (Reaction low/MT Break-up + weekly envelope).

Resistance is seen at 1.5752 (Reaction high), at 1.5773 (Breakdown daily), at 1.5795/00 (62% retracement ST/Daily envelope), at 1.5838 (76% retracment) and at 1.5909 (Reaction high).

The pair is in neutral territory.
USD/JPY

On Wednesday, USD/JPY copied the price action in other dollar cross rates (cf. EUR/USD). An early spike lower was reversed on the better stock market performance in Europe but later in the session resurfacing credit woes and the sell-off on the US stock markets caused USD/JPY to make a step backward again. The pair closed the session at 106.76, compared to 107.50 on Tuesday.

This morning, Japanese trade data were slightly better than expected. However, the domestic CGIP (corporate goods prices) again came out higher than expected at 0.8% M/M and 5.6% Y/Y. However, at least for now, those 'inflation pressures' are not yet considered a factor that might change the wait-and-see approach from the BOJ. Japanese/Asian stocks perform rather well this morning, especially if compared to the steep losses in the US yesterday evening and this slows the rebound of the yen.

Recently, we turned neutral on USD/JPY. The rejected test of the 108.58/62 area triggered a correction, but also this move petered out last week. The pair currently is perfectly in the middle of the short-term trading range confined by the 104.99 reaction low and the 108.62 range top. Over the previous days, the pair tried to regain the MTMA (106.83) and the uptrend line from the lows (107.93) but this attempted didn't succeed, which is a slightly disappointing signal from a short-term perspective. For the pair to resume the gradual uptrend beyond the key 108.60 area, an (sustained) easing of global market tensions and/or a material decline in the oil price are needed. These factors are not yet fulfilled and this makes us think that the pair will continue to be locked in the current sideways range. For now we maintain a wait-and-see approach. In a day-to-day perspective, more negative credit headlines might cause the pair to move somewhat lower in the established trading range.

USD/JPY: Tuesday's gains undone

Support stands at 106.66/49 (Reaction low/LTMA), at 106.30/25 (Daily envelope/Week low), at 105.93/69 (Reaction low/ Bollinger bottom) and at 104.99 (Last week low).

Resistance comes in at 107.04/29 (Break-down/daily envelope), at 107.75/77 (107.75/77 (ST high /2nd target double bottom), at 107.93 (Uptrend line), at 108.16 (Weekly envelope), at 108.58/62 (Reaction high/14 Febr. high).

The pair is in (slightly) overbought territory
EUR/GBP

On Wednesday, a poor UK consumer confidence figure initially kept the sterling under pressure and caused EUR/GBP to test bids in the 0.7970 area. However, as already seen several times recently, poor UK figures often only have a shortterm/ intra-day impact on EUR/GBP trading and the pair gave up the early gains later in the session (despite EUR/USD strength). EUR/GBP closed the session at 0.7938 compared to 0.7956 on Tuesday.

Today, the BOE will decide on interest rates but the Bank is widely expected to keep its policy rate at 5.00%. In this case, no policy statement should be expected.

Since mid April, EUR/GBP develops a very uninspiring consolidation pattern (0.7766/0.8098). We turned neutral on EUR/GBP as the pair shows no trading momentum at all. An attempt to move higher the last week again ran into resistance soon and the pair is now again completely paralyzed. A sustained break above 0.8018 is needed to conclude that the pair is able to unlock the current stalemate on the topside. The 0.7766 is the key range bottom that should provide strong support. We have a sterling skeptic bias longer-term, but this attitude obviously is of no help to guide short-term trading for now.

EUR/GBP: deadlock persists

Support comes in at 0.7928/26 (Break-up/MTMA), at 0.7914 (daily envelope), at 0.7900 (ST low) at 0.7885 (Break-up), at 0.7868 (last week low) and at 0.7847/31 (reaction lows).

Resistance stands at 0.7951 (ST break-down), at 0.7969/76 (ST high/Bollinger top), at 0.7980 (Weekly envelope)) and at 0.8003 (Reaction high).

The pair is in neutral territory.