Sunrise Market Commentary

Daily Forex Fundamentals | Written by KBC Bank | Jul 16 08 07:31 GMT |

US Treasury curve steepens on weak equities and slightly more dovish Bernanke More gains for Treasuries that end however off intra-day highs. Equities looked into the abyss early on, boosting Treasuries, but tumbling crude prices allowed equities to avoid the worst. Today's trading may bring more clarity about the near term outlook crude oil (US inventories) and equities that lost momentum at the very end of trading yesterday. Belgian and Spanish government bonds underperform Yesterday, European bonds extended their rebound on the Bernanke testimony and equity woes. Today, the CPI will be released, but it will again be the equity and oil markets that will decide the direction on the European bond market. From a relative point of view, Belgian and Spanish government bonds underperformed their European counterparts. FX: EUR/USD sets new all-time high, but test was rejected. Currency markets were influenced by conflicting signals. The yen was the major beneficiary of the new flaring up in global market stress. EUR/USD tested the all-time highs, but the euro apparently has no strong enough cards to become the real safe haven alternative for the dollar. The Sunrise Headlines US equities end a rollercoaster ride yesterday with 0.8-to-1.1% losses (Dow/S&P), but well off intra-day lows. Biggest losers are the energy sector (-4.2%) on plunging oil price and the financials (-3%) on ongoing solvency concerns. A late session relapse keeps uncertainty high reflecting in a mixed performance in Asia overnight Bernanke slightly more dovish, as he sees significant downward risks Freddie Mac & Fannie Mae financial strength rating cut by Moody's. Fannie's CEO says company won't need lifeline US bank shares sink to 1996 levels on loss fears. Citigroup falls to lowest level since its 1998 creation. GM said it would cut labour costs, sell assets and borrow 2 Bn. $ to bolster finances. J&J gains about 2% as it beats Q2 earnings estimates Crude oil (138.40 $) stabilizes overnight following a steep drop yesterday for which we didn't see any particular trigger. Concerns over US and global economy are correctly put forward as a possible cause, but of course were already apparent before. US CPI and oil inventories and UK labour market data highlights of the day Currencies: EUR/USD Sets New All-Time High, But Test Was Rejected On Tuesday, the crisis feeling was again omnipresent and contrary to what often happened recently, the currency market this time didn't escape from the global turmoil. Lingering concerns on how US authorities will handle the credit crisis (Fannie and Freddie and the problems at regional banks) already kept the dollar under pressure from the start of European trading. A shape decline in the German ZEW economic sentiment index temporary halted the rise in EUR/USD, but at that stage the European side of the equation obviously was not the major concern of the currency markets. So, EUR/USD hit new all-time highs in the 1.6035/40 area going into the US trading session. The US data were mixed to slightly softer than expected but didn't contain a clear signal for currency trading and EUR/USD even ceded some ground going towards Mr. Bernanke testimony before the Senate. While still mentioning inflation risk, the Fed president gave some more weight to the downside risks for the economy than was the case recently. Regarding the dollar, he admitted that the fall of the US currency might have contributed to the rise in oil prices but his assessment on this item was very balanced. So, at first glance, the Bernanke statement didn't contain much obvious support for the dollar. However, the dollar was saved by the other major wildcard, being oil. Oil dropped sharply and this contained the damage for both the stock markets and the dollar. At the end of the day, EUR/USD closed the session at 1.5912, little changed from the 1.5908 close on Monday. The price action in EUR/JPY also deserves some attention and put the EUR/USD developments in perspective. With markets recently focused on the credit problems of the US agencies, it is quite logical that the dollar comes under pressure first. However, the sharp decline in EUR/JPY yesterday suggests that the rise in the EUR/USD probably is not really a strong vote of confidence in the single currency but rather some kind of 'by default' reaction. Yesterday, the yen was the only real safe haven currency among the majors. Today, the calendar is again very interesting with the final European and US CPI data, the US TIC data and production data. The US CPI is the most important release. The combination of a high headline reading and a softer core figure should be rather neutral for the dollar. Of course, the second part of the Bernanke Testimony (Q&A) also deserves the markets attention. Yesterday, the assumption that EUR/USD had entered a consolidation pattern, confined by the 1.6020 to 1.5285 medium term trading range, was seriously questioned, but at the end of the day, the test of the topside was rejected. The jury is still out on this test, but if yesterday's price action is confirmed today, it suggests that, if US credit headlines turn less aggressive, the underlying assumption of the market remains that the longer-term economic picture for both the US and Europe is not that different. Both areas face a similar problem of too high inflation and low/slowing growth and the Fed and the ECB have little room of maneuver to fix this difficult situation any time soon. On top of that, the eco picture in Europe is deteriorating rather sharply, too. This suggests that a major break higher of EUR/USD is not evident. It is still early days, but the price action in EUR/JPY (cf. supra) points in the same direction. Yesterday, we said that EUR/USD had to move away from the EUR/USD 1.60 area soon and in a convincing way, otherwise, a new USD-selling wave might be on the cards. Yesterday's rejected test still asks for confirmation and EUR/USD is still too close to the highs to call off the dollar alert. However, at least for now, there is no convincing reason to front-run on a major break higher in EUR/USD. Stop-loss protection (e.g. in the 1.6050 area) is still warrant; However, in a day-to-day perspective, courageous dollar optimists may even to try to sell EUR/USD on up-ticks hoping that the range holds. EUR/USD: first test rejected. Support stands at 1.5864/61 (Reaction low/23% retracement), at 1.5839/22 (Week low/Weekly envelope), at 1.5800 (Break-up/MTMA), at 1.5747/40 (Daily Channel bottom/Boll Midline) and 1.5729 (Break-up). Resistance is seen at 1.5960 (Breakdown), at 1.5992 (Boll Top), 1.6018 (Daily envelope), at 1.6040 (All-time high), and at 1.6076 (Daily Channel top), at 1.6182 (Weekly envelope) The pair is in overbought territory. USD/JPY On Tuesday, the heat of the global market meltdown also triggered a significant move in the major yen cross rates. Over the previous sessions, the impact of the global credit turmoil on USD/JPY (and EUR/JPY) was rather modest, but this pattern changed yesterday. Already during the morning session in Europe; USD/JPY dropped below the first important support at 104.99, painting a short-term double top pattern on the charts. However, the 'damage' was not limited to USD/JPY as also EUR/JPY moved sharply lower. It has been different recently, but the yen apparently resumes its function of safe haven in stormy financial times. USD/JPY closed the session at 104.72 (compared to 106.15 on Monday). EUR/JPY currently tests the first important support (166.09 neckline). This morning, the Asian stocks markets traded mostly mixed, but this doesn't really help USD/JPY to regain the 105-resistence. Recently, we had a neutral bias USD/JPY. The rejected test of the 108.58/62 area triggered a correction, but an intermediate bottom was found at 104.99. However, yesterday's break below this levels, (if confirmed), makes the picture in USD/JPY short-term negative again. The signals from the most obvious drivers for USD/JPY (oil and stocks) are not that clear, but for now we take the technical picture as the factor with the highest weight for our day-to-day strategy and put the risk for additional losses in USD/JPY. The first target of the short-term double top pattern is at 102.23. USD/JPY: 104.99 support broken. Support stands at 104.16 (ST low), at 103.87/68 (Daily envelope/38% retracment), at 102.70/55 (Reaction lows), at 102.23 (Target double bottom). Resistance comes in at 105.12 (Daily envelope), at 106.46 (Break-down), at 105.72 (STMA), at 106.27 (MTMA), at 106.81 (ST high), at 106.91/08 (Break-down/weekly envelope). The pair is in neutral territory EUR/GBP On Tuesday, EUR/GBP initially moved slightly higher, probably due to spill-over effects from EUR/USD. However, the move was technically insignificant and a higher than expected UK CPI also helped to block the upside in this pair. Later in the session EUR/GBP first continued to trade in a very tight 0.7950/70 trading range, but an acceleration in the EUR/USD correction also caused EUR/GBP to close the session near the intraday lows at 0.7934, compared to 0.7974 on Monday. Today, the UK labour market data are scheduled for release. A deterioration in the conditions could be a (slightly) negative for the sterling. However, recently the impact of this kind of data most often only was of intraday significance. Since mid April, EUR/GBP developed 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 early this month again ran into resistance and also at the end of last week and early this week a test of the key 0.8033/34 area was rejected. After yesterday's price action, EUR/GBP is again in the middle of the long-standing trading pattern. So, the short-term alert on sterling is again called off. In a longer term perspective we hold on to our sterling skeptic attitude. EUR/GBP: ST sterling alert called off. Support comes in at 0.7925/23 (ST low/LTMA), at 0.7915 (Daily envelope), at 0.7900 (07 July low), at 0.7865 (MT Break-up), at 0.7868/61 (01 July/Boll bottom). Resistance stands at 0.7967/69 (Daily envelope/Reaction high), 0.8004 (Boll top), at 0.8022 (ST high), at 0.8033/34 (Reaction highs), at 0.8051 (Reaction high) and at 0.8098 (All-time high). The pair is again in neutral territory. News US: PPI accelerates, but retail sales disappoint PPI rose by a higher-than-expected 1.8% M/M and 9.2% Y/Y in June, the highest since June 1981. Consensus expected a more 'moderate' 1.4% M/M increase. As expected, energy prices, up 6% M/M (27% Y/Y) were the main culprit, but also food prices rose quite dynamic. On a more positive note, core PPI rose by 0.2% M/M and 3% Y/Y, slightly below expectations and keeping the Y/Y rate stable versus May. Pipeline inflation measures showed hefty increases. Crude goods PPI increased by 3.7% M/M (45.5% Y/Y), following a 6.7% M/M gain in May and Intermediate goods PPI increased by 2.1% M/M (14.5% Y/Y) following a 2.9% M/M increase in May. This suggests that price pressures at the finished goods level might still intensify in the next months. June Retail sales rose by a very disappointing 0.1% M/M (3% Y/Y), following a downwardly revised 0.8% M/M in May. Gas station sales, largely a price effect, jumped 4.6% M/M, added to give the report de qualification of weak. Core sales (excluding cars) were stronger at 0.8% M/M, following a strong 1.2% M/M, but fell nevertheless short of the 1% M/M increase expected. Car sales dropped 3.3% M/M The report is disappointing, as it concerns nominal sales, which means that real sales will still be lower (tomorrow's CPI will tell how much lower) and as it suggests the tax rebate checks won't have a big positive and sustainable impact. The NY Fed manufacturing survey suggested that the contraction in slowed in July somewhat, but labour market conditions deteriorated and price pressures intensified. The 'headline' general business conditions index rose to -4.9 from -8.7 and compares to expectations for -8. However, the details were on balance constructive with the exception of the labour market indices. Indeed, new orders jumped to 8.3 and shipments to 13.5 from respectively -5.5 and -6.5, passing the 0 boom/bust line. Unfilled orders (-8.4 from -10.5) and delivery times (-2.1 versus -7) improved more modestly. The number of employees index fell to -6.3 though (from 1.2) and the average workweek to -8.4 (from -2.3). The prices paid index set a new cycle high at 74.7 (from 73.3) while the prices received virtually stabilized at 47.4. EMU: ZEW economic sentiment tumbles The German June ZEW economic sentiment report shows that the deterioration of activity is fast deepening. The sentiment index dropped 11.5 points to an all time low of -63.9. It was the fourth straight decline. The current situation index, that is still at a historical high level and stabilized in February-to-June period, got whacked, as it dropped 20 points to 17. This is a sobering report that suggests that the German economy is slowing rapidly. French business sentiment index (Banque de France) dropped 1 point to 95 in June, a 5-year low, from a downwardly revised 96 previously. Also here the downtrend is well established. It confirms other sentiment data. Other: UK inflation surges higher in June UK CPI rose a higher-than-expected 0.7% M/M and 3.8% Y/Y, the highest since June 1992 and the second month inflation has been more than 1%-point above the BoE inflation target. Consensus was looking for a 0.4% M/M increase. Core CPI exceeded expectations too and rose to 1.6% Y/Y from 1.5% Y/Y in May. The larger than expected increase in the headline inflation rate indicates that the Bank has currently no room to cut rates, despite the recessionary economic environment. Download entire Sunrise Market Commentary