EUR/USD Below 1.40 !

Daily Forex Fundamentals | Written by KBC Bank | Sep 11 08 07:23 GMT | Sunrise Market Commentary

US Treasuries lose some modest ground in a meaningless session Equities, at a crucial juncture couldn't choose direction yesterday, leaving treasuries in a tie. However, equities will have to choose direction soon and this will be the driver for Treasuries. Today's data will be of secondary importance. While technical picture remains bullish, protection of longs looks appropriate. Weak German Schatz auction doesn't affect trading Yesterday, European bonds traded broadly sideways, despite some intra-day volatility on the results of Lehman Brothers and another weak German Schatz auction. As such, the technical picture is unaffected and still bullish. Today, equities will again be in the driving seat, as the data calendar is empty in the euro zone. EUR/USD below 1.40 ! No change in the strong EUR/USD downtrend as the reallocation away from the euro and towards the dollar persists. EUR/USD now comes close to the longstanding uptrend line since 2002. A sustained break below would signal the 'technical' end of the LT uptrend in this pair! The Sunrise Headlines US equities end higher (Dow gaining 0.34% and S&P 0.61% up) shrugging off Lehman woes. Asian stocks have dismal session led by financials. The Reserve Bank of New Zealand cuts the Official Cash Rate by 50 basis points from 8% to 7.50% as the economy is experiencing a marked slowdown led by the household sector. The NZD falls to its lowest level ($0.6515) since October 2006. Lehman Brothers announced to sell a majority stake in its investment management division and spin off real estate assets after posting a record third quarter loss of $3.9 billion. Lehman's share closed 7% lower. Australia's unemployment rate fell unexpectedly in August as employers hired 14 600 more workers even as the economy is slowing. However, Aussi cannot profit and sell-off continues unabated Washington Mutual's share plunged 30% as Standard & Poor's lowered the rating outlook from stable to negative and CEO Kerry Killinger is replaced. Crude oil fell to a five month low as a US government report showed declining demand. Today, oil prices rebound ($ 103.28) as hurricane Ike gained strength while entering the Gulf of Mexico. Today, the calendar heats up in the US with the trade balance, import price index and weekly claims. Currencies: EUR/USD Below 1.40 ! On Wednesday, the picture of EUR/USD trading wasn't much different from the previous sessions. The pair is grabbed in a forceful downtrend and there is hardly any news able to turn around sentiment. On the contrary, any up-ticks in the pair are still considered a selling opportunity. The eco data were few and had again no impact on trading. EUR/USD held stable in the 1.4100 area early in the session with the uncertainty on Lehman (results at 13.30) keeping investors on the sidelines. The results and strategic options the bank made public were not really able to take away the global uncertainty. Global investors reacted hesitant and also EUR/USD initially showed no clear directional reaction. However, the dollar gradually regained momentum. Another (temporary) decline in the oil price was again a good excuse to sell EUR/USD. However, the decline in the oil price halted later in US trading, but didn't prevent EUR/USD to go further south towards the 1.40 barrier. As already is the case for some time, interest rates are no good explanation for this move. In the market there is a lot of talk about US investor asset reallocation away from foreign assets returning to the US(D). It is only anecdotic evidence, but at yesterday's Freddie auction, foreign investors also showed renewed buying interest. At the same time, the eco picture makes the euro more vulnerable to global uncertainty, even if this uncertainty finds its origin in the US financial system. So, in the end there were still enough reasons not to fight the strong EUR/USD downtrend and the pair closed the session at 1.3998, again a decent loss compared to the 1.4133 close on Tuesday. Today, the eco calendar heats up, at least in the US, with the trade balance, import prices and the weekly jobless claims scheduled for release. On top of that, there is a long list of central bankers (mostly for the ECB) speaking. Over the previous weeks, EUR/USD was caught in a forceful downtrend. The decline in the oil price and growing signs of deterioration in the European economy (and elsewhere outside the US) caused a sharp re-allocation in favour of the dollar. The dollar even became favoured over the euro in case of global investor uncertainty, even if the source of that uncertainty comes from the US. In this respect, the euro was often traded in line with other carry trade currencies, losing ground against the dollar and the yen in case of global market tension. At this stage, the EUR/USD correction has already gone quite far and after such a strong move, a period of consolidation or even some profit taking is always possible. However, at least for now we don't see a trigger available for this to happen. On top of that, in a longer term perspective, also the fundamentals could gradually turn more dollar positive. The GSE measures might be a supporting factor for the US mortgage and housing market and one might expect the sharp decline in the oil price to give the US economy some additional breathing space in the months to come. With Europe and the rest of the world probably lagging the US, the eco environment could stay dollar constructive. EUR/USD: below 1.40! Support comes in at 1.3947/36 (Boll Bottom/New reaction low), at 1.3929 (uptrend line since 2002) 1.3852/40 (Previous July high/50 % retracement since 2005) and at 1.3822/11 (Starc bottom/daily envelope). Resistance is seen at 1.4002 (Breakdown hourly), at 1.4060/89 (Daily envelope/STMA), at 1.4178 (reaction high), at 1.4225/34 (ST high/Breakdown), at 1.4387 (MTMA). The pair is still in oversold conditions. USD/JPY From a technical point of view, the picture remains outright EUR/USD negative. The pair fell through a series of key support levels (especially 1.5285 and 1.4308 were high profile support levels on the charts) signaling a trend reversal in this pair. At least for now, up-ticks and/or periods of consolidation were very short-lived and attracted renewed selling interest. So, while oversold, the technical picture remains EUR/USD negative. The sharply downward oriented MTMA (today at 1.4387) and the previous low (1.4570) remain our first points of reference on the upside. A move above these levels would signal a loss of momentum in the dollar rebound. To be honest, we would be surprised to see EUR/USD regain the 1.4570 area in a sustainable way. On the downside the 1.3925 area (long standing uptrend line) is a key level to look out for. A sustained break below the latter would be a technical signal of the end of the almost 8-year uptrend in EUR/USD. Medium term, we hold on to our view that EUR/USD made a U-turn and has entered a convincing sell-on-up-ticks pattern. On Wednesday, USD/JPY gradually moved higher throughout the trading session. The pair started trading in the 107 area early in Asian trading and closed the session at a round 107.70. Only the uncertainty/headlines at the time of the Lehman result cause a temporary blip in the intraday uptrend. So, while global marker sentiment was still very fragile, the slight cooling in pressure was already enough for the dollar to regain some ground against the yen. However, for EUR/JPY the picture is still completely different. EUR/JPY yesterday remained under pressure and the pair this morning even dropped below the high profile 150 barrier and comes close to the August 2007 lows. This only illustrates that the dollar and the yen currently are the favoured safe haven currencies. The euro obviously doesn't belong to that category anymore. This morning, Japanese machine tool orders were close to expectations. Asian stocks again disappointed, but recently this was often no good pointer for the price action in the US and Europe. The impact on USD/JPY is also very moderate. On the technical charts, USD/JPY staged a gradual rebound from the mid-July reaction low to set a new reaction high at 110.68 on August 15. Since then, the pair entered a consolidation pattern and gradually slipped through a series of support levels. Recently, USD/JPY trading is closer related to what happens on the stock markets. This was yen supportive short-term. However, the yen tends to lose momentum as soon as the high profile negative headlines cool down. We still consider the pair as sideways oriented. A break above the MT reaction high (110.67) looks difficult. A drop below the 105.53 reaction low would make the picture more negative. For now, range trading within those barriers is favoured. USD/JPY: no strong directional trend Support stands at 107.29 (Reaction low), at 106.84 (Daily enveloped), at 106.58/54 (Week low/Boll bottom), at 105.53 (05 Sept low). Resistance comes in at 107.93 (Reaction high), at 10822 (MTMA), at 108.59/66.75 (Daily envelop/Daily flag top), at 108.76 (Boll Midline), at 109.08/18 (ST high/(Last Week high). The pair is in neutral territory. EUR/GBP Yesterday, EUR/GBP first showed no clear direction. UK traded data were again weaker than expected, but again this had no sterling negative implications. Later in the session the pair fell through the recent low in step with EUR/GBP and closed the session at 0.79875 compared to 0.8027 on Tuesday. Today, UK eco calendar is again empty. BoE members testify on the Aug 2008 inflation report before the UK Treasury Committee. A soft BoE tone on the recent eco and inflation developments is very well possible. Interesting to see whether this well be able to change the course of events on the recent sterling correction. If so, in theory it could be (moderately) sterling negative and slow the rebound of sterling against the euro. Last week EUR/GBP tried to break out of the longstanding sideways 0.7760/0.8098 trading range. Ongoing poor UK eco data, fears that the BoE might cut rates sooner than the ECB and the sterling being victim of a new wave of carry trade unwinding weighed on the UK currency. However, at the end of last week sterling gave some signals on a potential short-term trend reversal. We turned more cautious on the EUR/GBP uptrend as we feared that recent steep sterling losses and global euro weakness at some point could also trigger a correction in EUR/GBP. EUR/GBP returning below the 0.8100 area (previous range top) indicated an easing and this was confirmed as the pair dropped below the 0.8035/22 area (previous highs/neckline). We hold on to our view that it is too early for a major/sustained comeback of the sterling. However, we turn neutral on EUR/GBP and look out how strong the momentum of this correction will be. EUR/GBP sterling extends rebound Support stands at 0.7966 (ST low), at 0.7956/51 (LTMA/Targetr hourly channel break), at 0.7940 (MT reaction low), at 0.7926 (Daily envelope/ 62 % retracement 0.7766) and at 0.7919 (Daily Starc bottom). Resistance is seen at 0.8006/16 (Daily envelope/STMA), at 0.8041/50 (Reaction high hourly/MTMA), at 0.8077 (Week high), at 0.8095 (Weekly Boll top), at 0.8109 (Breakdown/ Reaction high hourly) The pair is moving into oversold territory. News EMU: French industrial production climbes on cars In France, industrial production in July came out better than expected rising 1.2% M/M, against the expected 0.2% M/M and a downwardly revised -0.6% M/M in June. On an annual basis, industrial production contracted 2.0% Y/Y, slightly lower than the June figure of -1.9% Y/Y. The strong monthly figure was based on a rebound in the automobile industry (5.1% M/M from -2.8% M/M). The outcome suggests some upside to the July EMU production figures due to be released tomorrow. Also the French trade balance came out better than expected in July at -4.8B against an upwardly revised -5.4B in June. The better-than-expected outcome was due to a fall of 1.0% M/M in imports and a rise of 0.3% M/M in exports. Other: Weak sterling pushes exports up In the UK, the total trade balance came out weaker than expected in July, showing a deficit of £4585, while the June figure was downwardly revised from -£4414 to - £4982. Looking at the details, exports were rising at a faster pace than imports, indicating that the weakness of the sterling helped to push up exports to the highest level in more than two years. 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.