Sunrise Market Commentary

Daily Forex Fundamentals | Written by KBC Bank | Sep 19 08 07:33 GMT |

US Treasuries tumble in late trading, as government mulls plan to solve the credit crisis During the day, Treasuries traded sideways but with a negative bias as equities nervously stabilized. Late in the session the government announced that a plan (cf. below) that might help solve the crisis. Equities understandable surged and Treasuries tumbled. More follow through is expected today. European bonds open sharply lower European bonds open sharply lower on the US plan. Given the extreme market tensions over the past days, a severe profit-taking move is likely. Although the reversal of recent safe haven flows will mostly hit the short end of the curve, we hold on to our positive view in a medium term perspective, as recent tensions in the financial markets have increased the downside risks to the economy and improved the outlook for inflation. Dollar gains on US bail-out plan After dollar weakness early in the session, the US currency was supported by the announcement of a US plan to address credit crisis. The yen was sold off. The dollar might gain further ground on this plan, but over time the eco fundamentals will gradually regain importance again and the jury is still out on the LT consequence of the recent developments for the currency markets. The Sunrise Headlines US Equities rebound sharply led by financials (+12%) after the government announced its plans to ease the credit crisis. Asian stocks jump higher as Chinese and US governments announced measures to fight against the credit crisis. US Treasury Secretary Paulson and Fed Chairman Bernanke say they were working on a 'permanent' plan to remove toxic mortgage-related debt from financials institutions' balance sheets. The UK Financial Services Authority imposed a temporary ban on short selling of financial shares for the rest of the year. The US indicated that they are weighing a similar measure. Chinese stocks jumped higher after the government declared it will buy shares on three of the largest state-owned banks and it scrapped tax on equity purchases. Lehman Brothers says it is in talks with Sumitomo Mitsui to sell Japanese assets, Sumitomo denied the rumours. Crude oil rises ($98.83) for the third consecutive day after falling sharply earlier this week. Currencies: Dollar Gains On US Bail-Out Plan On Thursday morning, EUR/USD extended its rebound after strong (mostly oil related) gains on Wednesday. At start of European trading, the major central bankers announced additional measures to support market liquidity and this caused some easing in global market tension (as mirrored in a cautiously positive open of the European stock markets). At first, EUR/USD showed no strong reaction but throughout the European morning session EUR/USD gained momentum and the pair tested offers well above the 1.45 big figure going into the US trading hours. The rebound in the oil price at that time again played a role, but the correlation was less obvious than on Wednesday. As is the case in almost all other markets, EUR/USD trading these days is very much order driven (by the way, the oil market is probably also driven by the unwinding of all kinds of correlation hedges). Later in the session, the rebound on the US stock markets on news headlines about a new plan/fund to address the credit crisis, supported the dollar and EUR/USD closed the session at 1.4348, not that much different from the 1.4326 close on Wednesday. Overnight, the dollar rebound continued and EUR/USD trades in the 1.4200 area at the moment of writing. Today, the European and the US calendars are empty. So, currency markets can focus on the global credit stories. 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 changed last Friday. After the Lehman/AIG break-down, EUR/USD entered calmer waters. Currency markets apparently became indecisive on which side to choose in case of rising overall tensions and on which economy would be most vulnerable to the fallout (financially and economically) of the credit crisis. At the same time, oil remained the most important driver for EUR/USD trading intraday. The US taking to lead in addressing the credit problems by creating room to downsize the banking sector's balance sheet currently puts the dollar in the pole position. So, in this context, it would be understandable for EUR/USD to drift lower in the ST consolidation range. In a longer term perspective we still look for evidence that the US economy will indeed avoid a major setback on the recent developments (and that over time the interest rate differential will go in favour of the dollar) before preparing for a new break higher in the dollar/lower in EUR/USD. Lingering uncertainty on how the problem will be tackled in Europe might be a short-term negative for the single currency, too. EUR/USD: has the correction run its course? Support comes in at 1.4156 (ST low), at 1.4096/74 (Reaction low/week low), at 1.4051/35 Weekly envelope/Breakup daily), at 1.3954 (LT uptrend line) and at 1.3882 (Reaction/Boll bottom). Resistance is seen at 1.4296 (Breakdown), at 1.4365 (Boll Midline), at 1.4468 (Daily envelope), at 1.4482 (Reaction high), at 1.4534/41 (Broken LT channel bottom/ST high) and at 1.4571/80 (Previous reaction low/Break-down daily). The pair is in neutral conditions. USD/JPY From a technical point of view, EUR/USD gave a short-term trend reversal signal on Friday last week. The pair yesterday set a reaction above the 1.4500-mark, but the key 1.4570 area (Aug 26 low) was not challenged. We hold on to our view that EUR/USD entered a consolidation pattern between 1.3882 (reaction low) and the 1.4575/80 breakdown area. After the rejected test of the upside of this range, we now favour a sell-on-upticks approach in EUR/USD with a potential retest of the 1.3954 (longstanding uptrend line)/1.3882 (reaction low) area. USD/JPY was again haunted by swings in investor sentiment caused by the unraveling of the credit crisis. So the pair jumped up and down in a 105.50/104.00 trading range, even testing the bottom of this range on intraday stock market weakness in the US, before the new headlines on the bail-out fund hit the screens. Since, USD/JPY staged a powerful rebound in step with the euphoria on the stock markets. USD/JPY closed the session at 105.44 (compared to 104.66 on Wednesday) and even trades in the 107.00 area at the moment of writing supported by strong gains on all Asian stock markets. 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 ‘credit events'. USD/JPY on Tuesday set a new reaction low in the 103.55 and there was no follow through selling, which was already a bit disappointing from a yen point of view, given the high level of stress on global markets. As the US plans could be a milestone for this crisis (of course subject to a lot of specifications and approval) this also could be a trigger for a rebound in USD/JPY. We adopt a buy-on-dips approach in this pair. It is still early days, but if the plan is indeed able to mark a U-turn in investor sentiment, return action toward the MT range top (110.66) could be on the cards. USD/JPY: dollar cheers bail-out plan Support stands at 106.43 (Break-up hourly), at 105.40/38 (St low/Broken STMA), at 104.43/31 (Boll Bottom/ daily envelope), at 103.54/32 (Reaction low/50% retracement) and at 102.55 (MT reaction low). Resistance comes in at 107.54 (Boll Midline), at 107.98/108.03 (12 Sept/Daily flag top), 108.63 (MT reaction high) and at 109.08 (08 Sept high). The pair is in moving into neutral territory. EUR/GBP EUR/GBP initially staged a remarkable rebound yesterday. The move can only be explained as driven by a global repositioning in stretched overall market conditions and was in step with the rebound of the single currency after the announcement of (coordinated) central bank measures to address the liquidity in global financial system. In line with market behaviour of late, the eco data had no impact on EUR/GBP trading. On the contrary, the sterling continued to lose ground after the publication of stronger than expected UK retail sales. This is another indication of order-driven trading. The EUR/GBP rebound shifted into a lower gear in the afternoon (more or less in strep with EUR/USD) and the easing of market tensions later in US trading even helped sterling to recoup almost all its intraday losses. EUR/GBP closed the session at 0.7891, not that much different compared to the 0.7883 close on Wednesday. Today, the UK calendar is empty 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. Recently, the sterling showed remarkable resilience vis-à-vis the euro (despite global market stress) and dropped below a series of intermediate support levels. Medium term, we hold on to our view that it is too early for a major/sustained comeback of the sterling. However, with short-term market sentiment being sterling friendly, the chances for return action towards the key 0.7760 reaction low are rising. EUR/GBP: sterling remains well bid. Support stands at 0.7855/51 (Eq. Cwave/ Weekly LTMA), at 0.7832 (Daily envelope + Boll Bottom), at 0.7795 (12 August low) and at 0.7766 (reaction low) Resistance is seen at 0.7896/04 (STMA + ST high), at 0.7927 (Daily envelope), at 0.7959/62 (LTMA/Reaction high) and at 0.7980 (MTMA). The pair is moving into oversold territory. News US: Leading indicators show a bleak outlook for the economy In the week ended September 13 the initial claims rose 10 000, coming out at 455 000, while the consensus was looking for a decline of 5 000 (to 440 000). Continuing claims were 55 000 lower in the week ended September 6; coming out at 3 478 000, while the previous figure was upwardly revised to 3 533 000. Both initial and continuing claims are at recession high levels and we don't see any improvement yet. However, the Department of Labour indicated that the initial claims were higher due to the fact that Louisiana could report claims for the first time after hurricane Gustav. The Philadelphia Fed survey on manufacturing surprised in September, coming out at 3.8 against -12.7 in August, while the consensus was looking for a more modest improvement. Looking at the details, new orders rebounded sharply (5.6 from -11.9) and also shipments increased significantly (2.6 from -3.3). The number of employees stayed broadly unchanged, while inventories fell sharply (-22.9 from -6.6). Both prices paid and received showed significant declines, for the second month in a row. With the Philly Fed improving and the NY Fed deteriorating it is until now difficult to make an accurate forecast for the National manufacturing ISM. The leading indicator fell by a more than expected 0.5% M/M in August following a 0.7% M/M drop in July, and it is now 2.7% below its level one year ago. Only four of the ten sub-indices showed an increase, indicating that the economic outlook for the next three to six months is bleak. Other: Strong retail sales, but volatile In the UK, retail sales came out surprisingly strong in August rising 1.2% M/M, while the consensus was looking for a decline of 0.5% M/M. Also the yearly figure surprised on the upside (3.3% Y/Y from 2.0% Y/Y). Strength was broadly based on a 4.1% M/M rise in textile, clothing and footwear and on a rebound in non-specialised stores (1.4% M/M from -2.0% M/M). Food sales was the only sub-index showing a contraction (-0.2% M/M). Recently, monthly retail sales were extremely volatile and it is therefore difficult to draw accurate conclusions. More important might be the sales volume in the three months June to August which fell 0.8% compared with the previous three months and indicates that retail sales are weak. 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.