Euro Hammered

Daily Forex Fundamentals | Written by KBC Bank | Oct 01 08 07:44 GMT | Sunrise Market Commentary

US Treasuries give up Monday's steep gains Easing of global market tensions caused investors to scale back safe haven Treasury holdings. The move was reinforced by hopes on the approval of a bailout plan. US bond trading is still very much order driven, but the prospect of a bailout plan could be negative for US bonds short-term. Sentiment European bond market remains bullish Despite yesterday's rebound on the equity markets, European bonds keep their composure and open strongly this morning. This suggests that the underlying sentiment on the European bond market is still quite bullish. Ahead of Thursday's ECB meeting, we continue to favour the short end of the curve and a further steepening of the European yield curve. FX: euro hammered The euro in general and EUR/USD in particular were heavily sold yesterday. The turmoil in the European financial sector and the hope that the US bailout plan might be approved later this week supported the dollar. However, FX trading is still mostly order driven. So, one should be cautious to draw firm conclusions. The Sunrise Headlines US equities regained some of Monday's losses (Dow / S&P +4.68% / +5.27%) on fresh hopes of a financial rescue plan. Most Asian stocks rise, but are unable to follow the sharp jumps in the US and European equities. The US Senate agreed to vote on a new version of the $700 billion bailout plan on Wednesday night. The adjustment includes a big increase in the amount of bank deposits protected by the government. The Tankan index, which measures business sentiment at big Japanese manufacturers, turned negative for the first time in five years indicating that large manufacturers are becoming more pessimistic on the economic outlook. Fortis halts its deal to sell half of its asset management arm to China's Ping An Insurance Co after it was partially nationalized earlier this week. Shares of HBOS fell as much as 20% amid speculation that Lloyds may reduce its offer by a quarter. Crude oil ($ 101.95) rebounds after falling sharply on Monday on new hopes of a US plan. The calendar is interesting today with UK Manufacturing PMI and ADP employment report and manufacturing ISM in the US Currencies: Euro Hammered Over the previous days, the swings in the currency markets, and in particular in EUR/USD, were often modest if compared to the hectic trading conditions in other markets. EUR/USD again kept a sideways trading pattern between 1.4425 and 1.4325 during the morning session in Europe. However, the single currency came gradually under more pressure as US traders joined the action and the euro got captured in a real stop-loss selling spiral. Better than expected US eco data (which we consider lacking credibility), ongoing turmoil in the European financial sector (why was this explanation used when most European banking stock were off the lows?), previews on the ECB interest rate decision later this week (whatever the ECB does it could be seen as euro negative) and hopes that a US bailout would still be approved this week, all were reasons brought forward on the dealer chat rooms. The interpretation of market moves is an area of free speech but in the current environment we tend to see this kind of moves the result of forced unwinding of positions in a market that still lacks the liquidity needed to absorb high volumes. Whatever, the explanation behind the move, EUR/USD tumbled sharply during the US trading hours and closed the session at 1.4092 compared to a 1.4434 close on Monday. Today, the calendar contains the first set of key economic indicators that usually get ample attention from the trading community (European PMI's, US ISM manufacturing and that ADP labour market report). They won't be completely ignored, but in the current market context the focus will remain on the details of the ‘new' rescue plan and on the chances it has to successfully pass the US parliament. Today, a vote in the US Senate is scheduled. In previous days, we advocated that the US bailout plan as such, even if the details and the specific impact for markets and the economy remain subject to a high degree of uncertainty, would continue to be a key factor for EUR/USD trading going forward. As illustrated earlier this week, it is dangerous to front run on an approval of this plan. However, if a plan passes it should be considered as positive for the dollar. After the approval, the focus could turn even more to the European approach to address the fall-out of this crisis on the European banking sector. For now the European approach mostly consists of ad hoc measures and as long as there are no tangible signs of some kind of global plan in Europe, this could be a short-term negative for the single currency. That said, we hold on to our view that also the currency market remains an order-driven market, with an important part of the deals driven by some kind of obligatory action/forced selling. However, at least for now, the flows apparently also go towards the US currency. EUR/USD: euro hammered Support comes in at 1.4073 (Reaction low), at 1.4008 (ST low), at 1.3974 (Daily channel bottom since 2002), at 1.3958 (Daily envelope) and at 1.3882/71 (Reaction low/Boll bottom). Resistance is seen at 1.4188 (Daily envelope), at 1.4292 (Breakdown), at 1.4380 (STMA) and at 1.4417 (MTMA). The pair is in oversold territory USD/JPY From a technical point of view, EUR/USD started a correction three weeks ago. The pair rebounded from the 1.3885-area, regained a first important resistance area and set a new reaction high in the 1.4865 area on Monday last week. This was a significant correction, but the key 1.4900/10-area (reaction highs) was not challenged. After yesterday's swift correction, the topside has become much better protected and the pair convincingly dropping below the MTMA (1.4416 today) which suggests that the pair is again downwardly oriented. We maintained a (cautiously) USD positive/EUR negative stance. The 1.3882 reaction low remains the first obvious target short-term. In a (very) long-term perspective, the longstanding uptrend line since the low comes in at 1.3974 Yesterday morning, USD/JPY tested the key 103.50/55 area in the wake of the rejection of the US bailout plan. However as global tensions eased, USD/JPY started an uninterrupted uptrend and closed the session at 106.11 compared to 104.18 on Monday. However, to put this into perspective, this was nothing more (or nothing less) than the unwinding of the losses of the previous session. This morning, the Japanese Tankan report showed that Japanese manufacturers turned pessimistic on the economic outlook with the headline large manufacturing index dropping into negative territory (from 5 to -3). Also most other important subindices showed a material deterioration in confidence. The yen lost a few ticks after the release, but the reaction was limited and very short-lived. The Nikkei this morning only shows modest gains, given the rebound in the US yesterday evening, but this is also the case for some other stock markets in Asian. USD/JPY still trades in the 106.00 area at the moment of writing. On the technical charts, USD/JPY set a reaction low in the 103.55 area after the Lehman crisis. The hope on a US bail-out plan propelled the pair again higher in the 103.55/110.68 trading range, but the gains could not be extended and renewed global market stress causes the pair to test again the range bottom. Recently, we indicated that we were not impressed by the yen performance and yesterday's rejection of the 103.50/55 support confirms our feeling that the downside in this pair won't be that easy. The fate of the bailout plan will also be the key for USD/JPY, but if the approval of the plan succeeds, it could help USD/JPY to move higher in the 103.55/110.68 trading range. In a day-to-day perspective, we put the risk for USD/JPY to extend yesterday's rebound. USD/JPY: forceful rebound of from 103.55 key support Support stands at 105.41 (Break-up hourly), at 104.91 (daily envelope), at 104.59 (Break-up hourly), at 103.89/52 (Boll bottom/Reaction low), at 103.32 (50% retracement). Resistance comes in at 106.96 (Week high/Daily envelope), at 107.01/22 (27 Sept/Gap hourly), at 107.42/50 (Weekly envelope/LTMA), 108.63 (MT reaction high) and at 109.08 (08 Sept high). The pair is in neutral territory EUR/GBP Quite remarkable price action in EUR/GBP yesterday! The pair followed a similar pattern compared to EUR/USD. The cross rate traded more or less sideways in the 0.80/0.7950 area during the morning session in Europe. However, the overall euroselling wave that started early in US trading also hammered EUR/GBP and the pair briefly lost more than one big figure, testing bids in the 0.7850 area. As is the case for EUR/USD we consider this order-driven price action in a market that is still rather illiquid. The pair regained some ground later in the session, but closed the day at 0.7913, compared to the 0.7981 close on Monday. Today, UK PMI for the manufacturing sector will be published. The figure is expected to come out slightly lower at a poor 45.00 reading. In the UK press this morning there is some debate whether or not the UK government should consider a similar guarantee for the UK banking sector liabilities compared to what has been put in place in Ireland. The potential impact of these kinds of measures for the UK budget, in theory should be negative for the sterling. Early September, 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, but last week, the rebound of sterling against the euro lost momentum. Even after yesterday's sharp sterling rebound the MT technical picture for EUR/GBP hasn't really changed. We hold on to our view that it is too early for a major/sustained comeback of the sterling, but we admit that we have to take a closer look at (potential) global euro weakness. For now we assume more sideways price action for EUR/GBP in the 0.7845/0.8016 range. 0.7760 remains the key medium support for this pair. EUR/GBP: sterling rebounds, but no technical signal yet Support stands at 0.7885/78 (Breakup hourly/Daily envelope), at 0.7844/39/36 (Reaction lows/Boll Bottom/Weekly envelope), at 0.7795 (12 august low) and at 0.7766 (range bottom). Resistance is seen at 0.7944 (breakdown), at 0.7968/72 (Daily envelope/ reaction high), at 0.7995 (Reaction high), at 0.8016/18 (Reaction high/50 % retracement), at 0.8051/57 (Breakdown/62% retracement). The pair is slightly oversold News US: Consumer confidence extends rebound Consumer confidence extended its rebound in September coming out at 59.8 while the consensus was seeking for a modest decline. The August figure was upwardly revised from 56.9 to 58.5. Expectations improved (60.5 from 54.1) while the present situation deteriorated (58.8 from 65.0) and also labour market conditions worsened. It is however important to note that the cut-off date for the survey was September 23 which might indicate that this figure does not fully reflect the effects of the latest turmoil in financial markets. The S&P Case Shiller house price index fell 16.3% Y/Y in July after falling 15.9% Y/Y in June, while the consensus was looking for a more modest decline of 16.0% Y/Y. The three-months annual figure improved further from -10.03% to -8.56% in June and is now clearly above the low (-24.9%) reached in March. Although the index is still falling, the month-on-month declines became smaller which indicates that some stabilization might be around the corner. Chicago PMI surprised again on the upside coming out at 56.7 in September, while a figure of 53.0 was expected. Looking at the details, production (71.4 from 63.4) and employment (49.1 from 39.2) rose sharply, while new orders (53.9 from 60.2), order backlog (54.9 from 63.0) and inventories (37.7 from 52.2) dropped. Prices were broadly unchanged (80.7 from 80.6). Regional PMI surveys came out mixed in September, but manufacturing ISM, released today, might paint a more accurate picture. The Chicago PMI results go against most, if not all other data about the economy and thus should be approached cautiously. EMU: Inflation slows for the second straight month The euro zone CPI estimate came out in line with the expectations at 3.6% Y/Y in September, after 3.8% Y/Y in August. This is the second straight drop after inflation peaked at 4.0% Y/Y in July, which might soften the ECB stance on inflation and bring a rate cut closer. We are looking forward to the ECB press conference on Thursday to see whether the lower inflation rate and tensions on financial markets have an impact on their view. In Germany, the number of people unemployed fell more than expected in September, declining 29 000 after 39 000 in August. Jobs created stayed unchanged at 39 000 in August and vacancies increased from 1 000 in August to 6 000 in September, which indicates that companies are still hiring new workers. The unemployment rate fell from an upwardly revised 7.7% in August to 7.6% in September. German economy has held up for long and this is reflected in a still strong labour market. The recent deterioration of the economy should be reflected in a weaker labour market in the next months 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.

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