Sunrise Market Commentary

Daily Forex Fundamentals | Written by KBC Bank | Sep 12 08 07:24 GMT |

* US Treasuries end volatile session slightly lower
Financial strains at first pushed Treasuries higher, but hopes on more government intervention put equities on a firmer footing later in the session, obliging Treasuries to head south. Eco data may be Treasury friendly today, but we suspect that the market is ripe for a correction, maybe on stronger equities.
* ECB still fears broad based second round effects
Yesterday, European bonds closed another volatile session almost unchanged. Although the technical picture is still bullish, the increased volatility over the past week suggests that the market remains vulnerable to some profit-taking. A fall below the uptrend line at 114.51 today would suggest that some downward correction is in the making.
* EUR/USD tests longstanding uptrend line. Decline to slow?
Global uncertainty made currency markets continue trading according to the established trading patterns. The yen was favoured; the dollar remains the second best while the euro fights an uphill battle. An easing of global market tensions (if it occurs) and some important technical support looming (especially in EUR/USD) might contain a trigger for EUR/USD sell-off to slow.

The Sunrise Headlines

* US Equities opened lower, but recovered on news that Lehman is in talks about a possible sale, driving also Asian stocks higher.
* Lehman Brothers says it is in serious talks about a possible sale after its share plunged more than 40% on Thursday; the Treasury and Fed were engaged in the talks.
* Washington Mutual is downgraded by Moody's to below investment-grade status as its access to debt and equity markets remains severely constrained. Washington Mutual responds that Moody's decision is inconsistent with their current financial condition.
* The Japanese economy shrank a bit more than originally reported in the second quarter raising fears that Japan is entering a recession as exports slow further.
* Oil continued its downtrend and has now approached the key $100 level, overnight fears about hurricane Ike drove oil slightly higher ($ 101.20).
* Today, the calendar contains exciting US data with the PPI, Retail Sales and Michigan consumer confidence.

Currencies: EUR/USD Tests Longstanding Uptrend Line

On Thursday, the same trading themes that were at work over the previous session continued to set tone for EUR/USD trading. Global economic and financially uncertainty, even if most of it comes from the US, still favours the yen (and to a lesser extent) also the US dollar. The euro fights an uphill battle. So, pressure on global stock markets also weighed on EUR/USD. EUR/JPY (temporary?) trading below the key 150/149 support area through the cross rates added to the negative pressure on EUR/USD. The intraday charts in EUR/USD also still have quite a high correlation with the oil price. So, EUR/USD set new lows around/just below the 1.39 mark around noon in Europe and early in US trading. In line with recent market behaviour, the US data (trade balance, PPI and claims) only had a temporary (negative) impact on the US dollar. Later in the session, the pressure on the stock markets eased (rumours that US authorities are engaged in negotiations with major banks to work out a solution for Lehman) and this also helped EUR/USD to move away from the lows. The pair closed the session at 1.3998 matching the close on Thursday.

Today, in Europe, the Industrial production data are on the calendar. In the US the PPI, retail sales and the Michigan consumer confidence are scheduled for release. Markets will in the first place be driven by global market factors (rumours on the measures that are expected over the weekend to stabilize the US financial system). (US) eco data recently at best only had an intraday impact on trading. This probably will remain the case today. Nevertheless, we will gradually grow more attentive on whether or not US eco data will show some improvement due the recent decline in oil prices.

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 became favoured over the euro in case of global investor uncertainty, even if the source of that uncertainty comes from the US. 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.

Longer term, we think that EUR/USD has turned the corner and if the fundamentals/ US eco data would gradually turn more positive (e.g due to the lower oil price), the dollar could gain further ground. Even if this week's market reaction was muted, the GSE measures over time might be a supporting factor for the US mortgage and housing market, too. As Europe and the rest of the world most probably lag the US, the eco environment could stay dollar constructive. However, the EUR/USD correction has already gone far and after such a strong move the chances for a period of consolidation or even some profit taking are growing. Easing global market tensions, e.g. in case of a Lehman solution this weekend may provide such a short-term trigger.


EUR/USD: tests longstanding uptrend line

Support comes in at 1.3925 (Reaction low hourly), at 1.3895/82 (Boll Bottom/ New reaction low + daily envelope), at 1.3852/40 (Previous July high/50 % retracement since 2005) and at 1.3773 (Starc bottom) and 1.3643 (2004 Dec low).

Resistance is seen at 1.4054 (STMA), at 1.4071/99 (Reaction high hourly/Breakdown hourly + daily envelope), at 1.4225 (ST high), and at 1.4345 (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 signaling a trend reversal and Yesterday EUR/USD even tested the high profile long-term uptrend line since 2002 (today at 1.3932).

For now the picture remains EUR/USD negative. However, yesterday EUR/USD painted a doji-like pattern on the daily charts and this could be a first warning signal that the downtrend is losing some momentum (in a day-to-day perspective). Further out the sharply downward oriented MTMA (today at 1.4345) and the previous low (1.4570) remain our first points of reference on the upside. A move above these levels would confirm 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. Nevertheless, in a day-to-day perspective some profit taking (or stop loss protection) on EUR/USD shorts is worth considering.

On Wednesday, ongoing global market tensions continued to support the yen. The pair started trading in Asia in the 107.87 area and gradually drifted lower during the European morning session and early in US trading to set an intraday low in the 106.05 area at the start of trading on the US stock markets. Easing pressures later in the session helped the pair to regain the 107-barrier later in the session. EUR/JPY showed a similar pattern; the pair set intraday-low in the 147.55 area but at the end of the day the pair was again close to the 150 mark.

This morning, Japanese data (final GDP and industrial production) had no impact on trading. Asian stocks post some cautious gains. However, the performance is again far from spectacular if compared to rebound late in US trading.

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 again 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. This could be the case if additional measures are taken to address the financial stress in the US. We still consider the pair as sideways oriented. A break above the MT reaction high (110.67) looks difficult to sustain. 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: in step with stocks

Support stands at 106.86 (Reaction low hourly), at 106.39/33 (Boll bottom/ Daily enveloped), at 106.04 (Week low), at 105.53 (05 Sept low).

Resistance comes in at 107.41 (STMA), at 108.03 (MTMA/daily envelope), at 108.55 (Boll Midline/Daily flag top), at 108.75 (LTMA), at 109.08 (Week high).

The pair is in neutral territory.
EUR/GBP

Yesterday, EUR/GBP extended the correction of the previous sessions. There were no eco data and the BoE members held a rather balanced approach in their appearance before the Parliament's Treasury committee as they acknowledged the economic downturn but continued to remain vigilant on inflation (and inflation expectations). EUR/GBP (more or less in step with EUR/USD) set an intraday low early in US trading at in the 0.7925 area but rebound later in the session to close the day at 0.7962 compared to 0.7987 on Wednesday.

Today, the UK eco calendar is empty. BOE's Tucher gives a speech at 12.30.

Last week 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 correction sending the pair lower in the previous range. As we turn more cautious on the EUR/USD decline short-term, the EUR/GBP correction might also shift into a lower gear. We hold on to our view that it is too early for a major/sustained comeback of the sterling. For now we stay neutral on EUR/GBP and look out whether yesterday's low will indeed be able to become a short-term support.

EUR/GBP sterling extends rebound, but

Support stands at 0.7958/51 (LTMA/Reaction low hourly), at 0.7922 (Daily envelope + Reaction low), at 0.7905/98 (MT reaction lows), at 0.7891 (Starc bottom).

Resistance is seen at 0.7980 (Reaction high hourly), at 0.7993 (STMA+ daily envelope), at 0.8003/16 (Previous reaction low/Breakdown hourly), at 0.8041/50 (Reaction high/MTMA).

The pair is moving into oversold territory.
News
US: Import prices fall significantly more than expected

The trade deficit widened more than expected in July (to 62.2 B), while the June figure was downwardly revised from -56.8B to -58.8B. Normally, both exports and imports decline during recessions, but this time both exports and imports increased, the latter mostly due to petroleum though. Ex-petroleum, the deficit narrowed to - 18.8B, illustrating that this months' deterioration in the deficit was broadly caused by higher oil prices.

In August, import prices fell sharply (-3.7% M/M), while the July figures were downwardly revised from 1.7% M/M to 0.2% M/M. On a yearly basis, the import price index declined from a downwardly revised 20.1% Y/Y to 16.0% Y/Y, while the consensus was looking for a more modest fall (20.2% Y/Y). Most of the decline was caused by a fall of -12.8% M/M in petroleum & products. We are now looking forward to see whether this severe plunge in import prices can be confirmed by today's PPI.

In the week ended September 6 initial claims fell by 6 000 to 445 000, while last month's figure was upwardly revised from 444 000 to 451 000. Continuing claims, which are reported with a one-week lag, rose 122 000 from a downwardly revised 3 403 000 to 3 525 000, while an outcome of 3 460 000 was expected. It is still important to note that claims have been elevated due to the Federal extension of unemployment insurance benefits, but with each passing week, the impact on the weekly claims fades. Nevertheless, the claims are at levels only seen in recessions and in recent weeks conditions are only worsening.



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.