Global Market Crisis Not Able To Give A Clear Signal For The Major FX Cross Rates

Daily Forex Fundamentals | Written by KBC Bank | Sep 18 08 07:25 GMT |

Sunrise Market Commentary US Treasuries thrive well in atmosphere of end of (financial) world Panic in banking world leads to steep losses in equity markets and a dangerous drying up of liquidity. Central Bankers open the liquidity spigot to keep system afloat. Will authorities succeed in calming markets by a 'deus ex machina' plan? Bund can barely gain on financial turmoil Trading is likely to remain extremely volatile, as an intervention of global central bankers appears inevitable, which may lead to some profit-taking on the bond markets. Overall, we are somewhat disappointed by the tepid gains of the Bund over the past weeks despite the severe market stress and fears for a financial meltdown. FX: global market crisis not able to give a clear signal for the major FX cross rates For now, global market tensions apparently only have a limited impact on EUR/USD. Even more, the correlation between EUR/USD and oil remains high. Given the high level of markets stress the yen gains are disappointing while sterling show remarkable resilience. The Sunrise Headlines US Equities tumble (Dow / S&P -4.1% / -4.7%) led by financials as investors fly to safety. Asian stocks track the downward trend despite injections of central banks. Morgan Stanley is in preliminary merger talks with Wachovia as its share price plunged after Lehman's bankruptcy on Sunday. Goldman Sachs also down 13.9%. Lloyds TSB agreed a rescue takeover of HBOS for £12 billion becoming Britain's biggest retail bank. Top US savings bank, Washington Mutual put itself up for sale, Citigroup and JP Morgan are assigned as potential bidders. US securities regulators tightened rules on short selling as they asked the commission to consider requiring hedge funds and large investors to disclose their short trade positions. Gold jumped above $860 an ounce as investors sought a safe haven amid the credit crisis. Crude slightly lower ($ 96.00) after jumping higher on Wednesday. Currencies: Global Market Crisis Not Able To Give A Clear Signal For The Major FX Cross Rates On Wednesday, initially the sharp swings in other markets had only a limited impact on EUR/USD trading. After some moderated gains in Asia, EUR/USD held a tight 1.4185/1.4270 trading range during the morning session in Europe as investors were on the watch out how US markets would react to the AIG solution as published the previous night. Also the sell-off at the start of US equity trading initially had no negative impact on the dollar against the euro. However, later in the session EUR/USD changed course and rebounded from the 1.41 area set intraday highs above 1.4350. It is always difficult to asses which way the arrow goes (from oil to the dollar or the other way) but the rebound coincided with a sharp rise in the oil price and to a lesser extent also a sharp rise in the price of gold (even if the matching with gold was far less tight as gold already started its rebound from start of trading on the cash US equity markets). So, at first sight, oil remains one of the most important drivers for EUR/USD, even at a time of heightened tensions on global markets. Nevertheless, we assume that the heavy pressure on the US financial system indirectly also played a role. EUR/USD closed the session at 1.4326, a decent gain compared to the 1.4129 on Tuesday. Today, there are no important eco data in Europe but in the current environment, markets will look out whether the non-monetary policy meeting of the ECB will yield any signals as to whether the ECB is preparing ‘something' to address the current financial tsunami. The US data will probably also have limited impact with all eyes are on the next developments in the credit crisis. Until a week ago, EUR/USD was caught in a forceful downtrend. The decline in the oil price and growing signs of deterioration in the European economy caused a sharp re-allocation in favour of the dollar. However, this trading paradigm has changed last Friday. After the developments over the weekend (Lehman), EUR/USD gradually entered calmer waters, even if pressure on Europe markets was at least as heavy as in the US. Apparently, currency markets were indecisive which side to choose in case of rising overall tensions. The Fed decision not to cut interest rates and the AIG measures also didn't really change the course of events for EUR/USD. So for now, the remarkable conclusion is that in this environment of overall market stress,oil and the technical picture probably will remain the two most important drivers for EUR/USD trading. The directional impact of the financial meltdown in the relative valuation of the euro versus the dollar is far less clear. Swings in other cross rates are also an additional source of volatility and in this respect yesterday's and this morning's small rebound in EUR/JPY is remarkable! remarkable intraday correction between oil and EUR/USD Support comes in at 1.4253/34 (STMA/MTMA), at 1.4197 (daily envelope), at 1.4163 (Break-up hourly), at 1.4074/51 (Week low/ Weekly envelope), at 1.4035 (MT break-up daily). Resistance is seen at 1.4397 (Boll Midline), at 1.4459 (Daily envelope), at 1.4482 (Reaction high), at 1.4527 (Broken LT channel bottom) and at 1.4580 (Break-down daily). The pair is in neutral conditions. USD/JPY From a technical point of view, Friday's reversal signal that the downtrend was losing momentum is confirmed this week. The pair currently trades above the STMA (1.4253) and even above the MTMA (1.4234). The picture is still far from cleared out and one should expect more wild swings in the days to come. However, for now we assume EUR/USD to have entered a consolidation pattern between 1.3882 (reaction low) and the 1.4575/80 breakdown area. We are a bit surprised by yesterday's rather bold rebound. A sustained rebound above 1.4570/80 would put on hold the scenario that the current move is only a consolidation on the recent EUR/USD downtrend. For now we hold on to the view that this area should hold. Logically, the heightened global market tensions continue to support the Japanese currency and USD/JPY drifted lower throughout the trading session yesterday. The currency pair set intraday highs in Asia in the 106.50 area and closed the session at 104.66 (compared to a 105.65 close on Tuesday). However, given the elevate level of overall market stress, we can not but conclude that the yen gains are not really spectacular. USD/JPY even didn't test the Tuesday reaction low (103.55). As mentioned above, this conclusion also applies to EUR/JPY as this pair even gained some ground despite the financial meltdown, which is quite remarkable. This morning, Japanese eco data were mixed (tertiary industry index and department store sales), but even more than usually is already the case, the impact of the data on trading was non-existent. Additional (often sharp) losses on almost all Asian stock markets again are not really a big help for the yen this morning. USD/JPY hovers in the 104.20/90 area. 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 gradually slipped through a series of support levels and this move accelerated after this weekend's developments. USD/JPY on Tuesday set a new reaction low in the 103.55. In the current environment of high global market tensions and investor risk aversion one shouldn't go yen short, but as the yen gains are disappointing, the risk is for a rather sharp repositioning if global market tensions ease. USD/JPY: 103.55 low holds (at least for now) Support stands at 104.19/12 (ST low/Boll Bottom), at 103.54 (Reaction low), at 103.32 (50% retracement) and at 102.70/55 (Daily envelope/MT reaction lows) and at 101.20 (Broken daily downtrend line). Resistance comes in at 104.93 (ST high/daily envelope), at 105.34 (STMA), at 105.97 (Reaction high) and at 106.76 (MTMA). The pair is in oversold territory. EUR/GBP On Wednesday, the news headlines came out sterling unfriendly. The sharp swings in the HBOS share brought the stress in the UK financial sector again to the forefront and this probably was a factor for sterling weakness at the start of trading. Later in the session the eco data came also out very poor with the jobless claims rising at an accelerated pace and the CBI industrial trends survey painting a very poor picture on the activity in the sector. The CBI even advocated an early BOE rate cut. The minutes of the previous BOE meeting should also be considered as rather dovish, but all this factors again had no lasting negative impact on sterling anymore. On the contrary, after the initial uptick in EUR/GBP (intraday high at 0.7984), the pair quite swiftly returned to the 0.7930 area. The news headlines on merger talks between HBOS and Lloyds apparently eased the pressure. So, in line with the recent price action, the sterling still proved again quite resilient to negative news headlines or global risk aversion and after the European close the EUR/GBP pair even dropped below the previous low in the 0.7908 area Today, the UK retail sales (and money supply data) are on the agenda. Regarding the retail sales, one should expect a rather sharp decline after the surprisingly strong July figure. However, in line with recent price action, it is doubtful whether this will be a major factor for EUR/GBP trading. Two weeks ago, EUR/GBP tried to break out of the longstanding sideways 0.7760/0.8098 trading range, but the test was rejected and this triggered a significant correction sending the EUR/GBP pair again in the previous range. We are quite surprised by the sterling gains vis-à-vis the euro in the current environment of global risk aversion and EUR/GBP yesterday breaking below the 0.7900 support area suggests that the EUR/GBP correction might have somewhat further to go. Has the paradigm of unwinding of carry trades (e.g. GBP/JPY) run its course? Medium term, we hold on to our view that it is too early for a major/sustained comeback of the sterling. The 0.7760 reaction low remains the key point of reference medium term. EUR/GBP: sterling shows remarkable strength. Support stands at 0.7865 (ST low), 0.7852 (Weekly LTMA), at 0.7838 (Daily envelope), at 0.7795 (12 August low) and at 0.7766 (reaction low Resistance is seen at 0.7908 (Previous reaction low/STMA), at 0.7926 (Daily envelope), at 0.7961 (LTMA), at 0.7984 (Reaction high hourly), at 0.8005/12 (ST high/MTMA). The pair is moving into oversold territory. News US: Housing starts worsen led by a sharp decline in multi-family units In August, housing starts fell 6.2% to an annual 895 000 units, while the consensus was looking for a more modest decline (to 950 000). The July figures were downwardly revised from 965 000 to 954 000. Most of the plunge was due to multi-family homes falling 15.1% M/M (from 26.8% M/M), while single-family homes fell a more modest 1.9% M/M. Looking at regional data, starts fell in the Northeast, Midwest and South, while sales were higher in the West. Housing permits showed the same picture falling 8.9% to an annual 854 000 units, against the expectation of 927 000. Single- family homes fell 5.1% M/M, while multi-family homes fell 15.0% M/M (from - 32.4% M/M). The number of homes under construction fell from 956 000 to 947 000. The sharp decline in multi-family units might reflect the changing of NYC construction codes, but also single-family homes show significant declines. Other: Minutes show a more dovish BoE In the UK, the labour market showed serious signs of a deterioration with the jobless claims rising 32 500 in August, while the consensus was looking for a significantly lower increase of 23 000. The July figure was upwardly revised from 20 100 to 27 800, which indicates that overall claims were 17 200 above the expectations. Avg earnings including bonus (July) were expected unchanged (3.4% Y/Y), but came out higher at 3.5% Y/Y, while avg earnings ex bonus were unchanged at 3.7% Y/Y against the expectation of 3.6% Y/Y. Nevertheless the earnings remain at low levels. The Minutes of the Bank of England Monetary Policy Committee revealed a two-way split with eight members voting to keep rates unchanged and Blanchflower the only member voting for a reduction of 50 basis points. Besley, who voted for a rate hike in July and August, became more dovish and changed his opinion voting for an unchanged rate in September. The Committee indicated that a case could be made for an increase but the impact on sterling would be uncertain and for some members, the downside risk to inflation in the medium term from slackening demand had increased. A case could also be made for a reduction in the Bank rate as aggregate demand, and particularly final domestic demand had slowed significantly, while financial conditions had remained stressed for longer than expected. However, the prospects for export demand and import penetration were more encouraging given the likely impact of sterling's depreciation. The Minutes were quiet surprising as no one voted for a rate hike. This could indicate that the MPC is becoming more dovish and a rate cut could be expected as soon as inflation falls back. The CBI Industrial trends survey showed a sharp deterioration in the total order book (-26 from -13). Output expectations have fallen to a seven-year low (-16) and also the export order book deteriorated significantly (-25 from -9). The CBI Chief Economic Adviser added on the weak figures that the BoE should consider cutting rates soon. 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.