Forex Brokers Dollar Extends (Mostly Oil-Driven) Rebound

Daily Forex Fundamentals | Written by KBC Bank | Jul 24 08 07:38 GMT |

Sunrise Market Commentary US Treasury sell-off slows US Treasuries limited its early losses and closed marginally lower on a strong 2-year Note auction, sideways moving equities and short covering. Has sell off gone far enough? Today's Existing Home Sales may give us some clues Bund does not fall below key support, but can it move higher too? . The key support was the main factor in yesterday's trading. Today's PMi's and national business confidence data may confirm the fast deterioration of the eco outlook. Inflation expectations are falling on lower oil prices. If ECB talk now becomes also soften, we might even see a rally. FX: dollar extends (mostly oil-driven) rebound A further decline in the oil price and (to a lesser extent) an improvement in global investor sentiment support the US currency, improving its technical picture, both against the euro and the yen. Sterling spikes higher on BOE minutes. Today, the EMU data might get some attention and turn the focus of the currency markets away from oil. The Sunrise Headlines US equities advance as oil price drops sharply and on optimism about a rescue plan for Fannie Mae and Freddie Mac. Asian stocks again higher with Nikkei closing 2.2% higher. Reserve Bank of New Zealand cuts its benchmark interest rate by 25 basis points to 8%, saying slowing economic growth will curb inflation, NZ dollar falls to a 6-month low. George W. Bush dropped a threat to veto a housing-bailout bill that would extend a potential $25 billion lifeline to Fannie Mae and Freddie Mac. S&P's ratings services lowered its credit rating on Washington Mutual and removed it from watch as the outlook is stable. Credit Suisse Group AG second-quarter earnings dropped less than expected as the investment banking unit returned to profit. Oil ($125.30) fell below $125 after reports showed a crimp in demand in the US and Japan due to high oil prices. Calendar is well-filled today with PMI's in the euro zone, UK retail sales and jobless claims and existing home sales in the US. Currencies: Dollar Extends (Mostly Oil-Driven) Rebound On Wednesday, the dollar extended its rebound against the euro (and against most other majors). On Tuesday, oil was the dominant factor to support the US currency and also yesterday, the intraday correlation between oil and EUR/USD was again very high. Markets are turning somewhat less focused on the theme of the credit crisis and the improvement in the global stock market sentiment also might have been supportive for the US currency. Later in the session the Beige Book painted a slightly less bright picture of the US economy, but continued to register elevated or even increasing price pressures. The report pushed US yields slightly higher and also helped the dollar to reach intraday highs against the single currency with EUR/USD testing bids in the 1.5670 area. EUR/USD closed the session at 1.5698, still a decent gain of the dollar compared to the 1.5786 close on Tuesday. Today, the calendar in Europe contains the Advance PMI releases for the month of July, the German IFO indicator and business confidence indicators in some other European member states. In the US, the initial claims (were surprisingly low over the previous weeks) and the existing home sales are scheduled for release. The US data probably will only have intraday impact on trading. However, this time also the European side of the equation deserves some attention. In this respect it will be interesting to see whether a negative surprise in the European data, if it occurs, does change the market expectations for ECB monetary policy action and/or for the single currency. At the moment of writing, the headlines of an interview with EU's Alumina hit the screens. The Commissioner considers calls exchange rates a real problem, sees the euro overvalued but recognizes the risk for a further fall in the US dollar. Last week, EUR/USD tested the top of the MT term sideways trading range as resurfacing credit concerns (GSE's) weighed on the US currency and EUR/USD briefly traded above the previous highs at 1.6020. However, there was no follow-through price action to confirm this break. An easing of the credit concerns after the results from (some) US financial majors and even more a sharp decline in oil prices eased the pressure on the dollar. Recently, we advocated that there is not a compelling reason for EUR/USD to engage in a new strong up-leg beyond the 1.6020/40 range tops as we expect European data to show ever growing signs of weakness in the European economy, too. Today's confidence data in this respect could be an interesting test case. On the other side of the Atlantic, the feeling is that the Fed has the intention to raise rates as soon as possible. However, until now, currency markets react in the first place to the oil price rather than to eco data (or central bank guidance). Will this pattern be amended by today's (European) data? EUR/USD: correction extended Support stands at 1.5671/62 (ST low/50% retracement), at 1.5644 (23 Retracement LT), at 1.5625/20 (Daily envelope + daily Boll Bottom/target ST double top), at 1.5611 (07 July low) and at 1.5576/73 (MTBU/62 % retracment ST). Resistance is seen at 1.5732/48 (Break-down hourly/Daily envelope), 1.5782/88 (Beckline double top/STMA), at 1.5837/36 (Break-down Daily + Hourly) and at 1.5864/88 (Broken channel top/Break-down The pair is in neutral territory. USD/JPY Last week and early this week, we argued that EUR/USD had to move away from the EUR/USD 1.60 area soon and in a convincing way to avoid the risk of an additional USD stop-loss selling move. The sharp decline in the oil price helped this scenario to come true this week. On Tuesday, the pair fell below the ST uptrend line/channel bottom (today at 1.5845) and this is a ST USD positive. So, we hold on to our view that the topside in this pair should hold and maintain our cautious sell-on-upticks approach. The target of the channel break comes in at 1.5488. Except for the sharp spike higher at the start of European trading yesterday morning, oil was also the most important factor for USD/JPY trading yesterday. The pair tried (and still tries) to regain the previous highs in the 107.75 area in a sustainable way. Equity markets apparently were less decisive than the oil prices. The pair closed the session at 107.90, compared to 107.32 on Tuesday. As was already the case over the previous the moves in EUR/USD and USD/JPY obviously were dollar moves. EUR/JPY still holds a very tight range in the 169-area. So, the highs and the psychological level of 170 remains within striking distance. This morning, Japanese trade balance data came out weaker than expected. Asian (and in particular Japanese) stocks continue to perform well, but for now this has no big impact on yen-trading this morning. Looking at the charts, the turmoil on global markets caused USD/JPY (and EUR/JPY) to temporary drop below first important support levels (USD/JPY 104.99; EUR/JPY 166.09) last week. However, this signal was soon reversed. USD/JPY is now again in the previous sideways trading range (cf. graph). Oil, (the easing of?) credit concerns and the global stock market performance remain the key drivers for this pair. We had/have a neutral view on USD/JPY. Recently, the 200-day moving average (today at 106.99) proved to be a strong resistance. A sustained break above this level (and above the 107.75 reaction high= neckline double bottom) materially improves the technical picture in this pair. However, we are still a bit reluctant to jump on a move that is so highly depended on the oil price. On top of that, key technical resistance levels are lining up 107.75 (still under test, and 108.58; cf. graph). We take a tactical approach and look how the range top behaves. A correction in EUR/JPY (if it occurs) also might make further gains in USD/JPY less easy. For investors who want to go dollar long we prefer USD/EUR rather than USD/JPY, for now. USD/JPY: dollar extends rebound Support stands at 107.48/32 (Daily envelope/Break-up), at 107.07 (Break-up), at 106.96 (LTMA+200d MA), at 106.50/54 (MTMA/Boll Midline), at 106.03/95 (Reaction lows). Resistance comes in at 107.93/97 (Weekly envelope/week high), at 108.18 (Boll Top), at 108.43 (Reaction high) and at 108.58/67 (Range top/daily envelope) The pair is in overbought territory EUR/GBP It hasn't been the case for long, but on Wednesday, EUR/GBP showed quite some impressive price action. The pair opened the session in the 0.7920 area, but declined throughout the whole session, with the BOE minutes the catalyst for this move. Those minutes showed a surprise 7-1-1 vote to leave rates unchanged and especially the one vote in favour of a rate hike (from Besley) apparently was a surprise to the market. The global framework for the BOE policy going forward was not that different from recent BOE guidance, but the BOE making its next decision more dependent on the new inflation rapport available next meeting might have been a factor that tilts slightly more to a rate hike and that supported the sterling. Rumours on possible take-over targets in the UK banking sector could have been a sterling supportive factor, too. EUR/GBP closed the session at 0.7850, a decent gain for sterling compared to the 0.7925 close on Tuesday. Today, the UK retail sales are on the agenda. Markets will look out to what extent the May figures was an outliner. Since mid April, EUR/GBP developed a very uninspiring consolidation pattern (0.7766/0.8098). We turned neutral as the pair shows no trading momentum at all. Several attempts to move higher ran into resistance. Early last week a test of the key 0.8033/34 area was again rejected and yesterday's sharp move brings the pair close to important support levels. We are a bid surprised by yesterday's sharp reaction to the Minutes and in a longer-term perspective we hold on to our sterling skeptic attitude. However, after trading in a very narrow range for such a long time, a break of key support levels could trigger an additional repositioning short-term. The pair dropping below 0.7831 would be an important warning signal. A break below 0.7766 would raise a red alert to our sterling negative view (Stop-loss protection). EUR/GBP: coming close to first key support Support comes in at 0.7839/36 (Week low/Channel bottom), at 0.7831 (MT reaction low), at 0.7824 (Daily envelope) and at 0.7766 (Reaction low). Resistance stands at 0.7873/82 (Daily envelope/Break-down), at 0.7902/14 (STMA/Break-down), at 0.7933 (MTMA +Boll Midline), at 0.7974 (Week high), at 0.7984(Reaction high). The pair is in overbought territory. News US: Beige Book: weaker activity but elevated/increasing price pressures The latest Beige Book's assessment (summarized by the Kansas Fed) of eco activity was modestly weaker than the previous Book six weeks ago. The Book said that the pace of eco activity slowed somewhat since the previous report whereas in the previous Book described economic activity as remaining generally weak. Five districts noted a weakening in their economies, whereas Chicago spoke about a sluggish economy and Kansas noted a moderation in growth. St-Louis said activity was stable and San Francisco reported little to no growth. On the other hand, Cleveland and Minneapolis reported slight increases in activity, while Dallas saw growth as steady and moderate. Compared to the previous report, the weakening in commercial real estate activity needs to be highlighted, as is a further tightening of credit conditions and a deterioration in loan quality. The tax rebates had some impact on consumer spending but not much. On prices, the Book said that all districts characterized overall price pressures as elevated or increasing, whereas wage pressures were generally limited, as labour demand was soft. So the Book fully confirmed the catch-22 position of the Fed with softening growth and rising price pressures. EMU: Weak industrial orders confirm cool-down Euro zone industrial orders fell 3.5% M/M and 4.4% Y/Y in May, which is far below the expectations (-1.3% M/M and 2.1% Y/Y) and the better-than-expected figures in April (2.0% M/M and 12.3% Y/Y). The details show that all components were deteriorating. These very weak data show that growth is cooling down and the advancement of the euro dampens demand. French consumer spending came out at -0.4%M/M and 1.0% Y/Y in June, slightly exceeding expectations (-0.6% M/M), after rebounding in May (1.7% M/M and 2.8% Y/Y). Looking at the details, only household equipment increased (0.8% M/M from - 0.3% M/M), while the car component fell the most (-3.8% M/M from 5.6% M/M). This figure confirms that last month's rebound was only a correction and consumer spending is expected to stay weak, as higher food and energy prices undermines disposable income needed for other purchases. However, the report doesn't suggest either that consumer spending is falling off the cliff. Other: BoE Besley votes for a rate hike!! In the UK, the Minutes of the July policy meeting revealed an 7-1-1 vote in favour of unchanged rates. As he cited earlier this week, David Blanchflower voted again for a 25 basis points rate cut. Tim Besley unexpectedly voted for a rate hike by 25 basis points and agued it was needed to keep medium-term inflation expectations anchored and ensure the Committee's credibility in the light of the current and prospective increase in CPI inflation. But the MPC majority had a different view and argued that an increase in Bank rate in the current circumstances, when confidence was low and the financial sector fragile, could impart a downward momentum to the economy that risked a significant undershoot of inflation in the medium term. Another argument was that a rate change would be better communicated alongside the Bank's August inflation report. This could raise expectations for a rate hike in August, but we don't expect a rate change soon. The CBI Industrial Trends survey fell more than expected in July. The total order books balance was -8 this month after 1 in June, while a reading of -5 was expected. Domestic price expectations jumped to 34 from 28 last month; the highest level since January 1990 showing that inflationary pressures are increasing. The CBI quarterly survey slumped to -40 from -23 in the previous quarter, bringing business optimism at its weakest since October 2001. Download entire Sunrise Market Commentary Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.