Big Intra-Day Swings, But No Clear Trend

Daily Forex Fundamentals | Written by KBC Bank | Nov 06 08 08:36 GMT |

Sunrise Market Commentary US Treasuries slightly higher on dismal eco reports and plunging equities Treasuries ultimately ended modestly higher. Eco reports were weak, but the market get used to it and equities plunged, which is a positive, but wasn't able to push Treasuries distinctly higher. On the negative side, there was the refunding package of 55 billion $, a record high and plunging Agency spreads and swap spreads. Big picture remains unchanged. Aggressive rate cuts expected from the ECB and BoE European bonds and Gilts gained further ground yesterday ahead of today' ECB and Bank of England rate decision, where aggressive rate cuts of at least 50 bps are expected. Should some disappointment kick in afterwards, it might be an opportunity to step again into the market. FX: big intra-day swings, but no clear trend The Obama victory was no big help for the dollar. During the day the US currency even lost ground against most other major currencies in an order-driven market. Today; the ECB and BOE interest rate decisions will be closely watched at the currency desks. In particular EUR/GBP is close to key technical resistance The Sunrise Headlines US equities cannot extent rally on Obama election and close down 5%. Declining sentiment in the service sector and big losses in private employment affected sen-timent. Asian stocks follow WS lead and drop substantially on economic worries and lower commodities. IMF approves 16.5 billion $ Ukraine loan, first tranche. Belgian government gives a maximum of 240 billion $ guarantees on bank debt of Fortis and Dexia for a price between 25 and 50 basis points. US House democrats urges passage of new 61 billion $ stimulus package, but much will depend on outgoing president Bush. Europe set to slash rates as gloom deepens GM says car industry faces critical 100 day period. Crude oil (64.63 $) drops sharply on Wednesday, following a steep rally on Tues-day on eco weakness and despite mixed inventory statistics Currencies: Big Intra-Day Swings, But No Clear Trend On Wednesday, EUR/USD showed again some marked swings. The announcement of the Obama victory in the US presidential caused a temporary rebound of the USD dollar, with EUR/USD testing bids in the 1.2800-area in Asian trading. However, this pocket of dollar strength was very short-lived and during the session the euro man-aged to stage quite a strong rebound, even if the market environment was not really euro supportive. The European data (Final services PMI) were again very weak and also the poor stock market performance recently used to be euro negative. The EUR/USD rebound even accelerated during the morning session in the US as the US data (ADP and ISM non-manufacturing) confirmed picture of the US economy sliding ever deeper into recessionary territory. Later in US trading, the EUR/USD cross rate pared part of the early gains due to the decline in the oil price (despite lower than expected US inventories) and the sell-off on the US stock markets. Never-theless, EUR/USD closed the session 1.2954, little changed from the 1.2981 close on Tuesday evening. The economic data yesterday might have played a role to ex-plain the intraday price action, but after all also for this currency pair this is still very much an order driven market. Overnight, EUR/USD lost some further ground. We tend to explain this move rather as being the result of global market factors (stocks, oil price) rather than speculation on the ECB interest rate decision scheduled for to-day. Today, there are some second tier eco data on the agenda, but all eyes in the mar-ket today will be on the ECB and the BoE interest rate decision. In both cases, a 50 basis points rate cuts looks like a done thing. The question is: will they to more? De-spite recent dovish ECB talk we still consider the 50 basis point scenario as the most likely scenario with the Bank preparing additional steps in the near future (Decem-ber). If this scenario comes true, it should be fairly neutral for the single currency. In this case, EUR/USD trading will continue to be driven by the order-flow and the global financial environment. However, with markets desperately looking for meas-ures to kick-start economy, a larger than expected ECB interest rate cut shouldn't in advance be considered as euro negative. Our standing view is that a prolonged period of sub par growth and a deflationary environment is more supportive to the dollar than to the single currency and this was an important factor behind the decline of EUR/USD from 1.60 to below 1.24. This is also the main reason for our EUR/USD negative view longer term, which re-mains intact. However, over the previous days, the single currency showed some-what more resilient, even at time times when the global market environment was not really euro supportive (oil, stock market decline yesterday). We don't draw firm con-clusions from yesterday' price action yet and look out for the market reaction on the ECB interest rate decision. For now, we hold on to our view that the pair entered a sideways trading/consolidation pattern within the boundaries of 1.231 and 1.3297. However, we stay open-minded as we feel that the downside in this pair might be-come better protected short-term. From a technical point of view, EUR/USD since the last week of September tum-bled from the 1.4866 reaction high to levels below the 1.24 mark early last week. High profile intermediate supports like the longstanding daily uptrend line since 2002, the previous low at 1.3882 and the 1.3259 10 Oct reaction low were all taken out with remarkable ease, but a powerful rebound occurred last week. EUR/USD needs to return above the 1.3259/94 (previous reaction low/reaction high) in a sustainable way to get a first indication that EUR/USD sentiment is improving. Recently, we favoured a sell-on-upticks approach in case of return action higher in the above mentioned trading range. From a technical point of view, there is no need to change tactics yet, but a break above the 1.33 area would be an indication that the EUR/USD rebound/correction could have some further to go (at least partial stop loss protection). EUR/USD: higher in the established trading range Support comes in at 1.2790 (ST low), at 1.2777/61 (Break-up/Daily enve-lope), at 1.2695 (Break-up), at 1.2527/06 (Week low/Stop & reverse). Resistance is seen at 1.2976 (Break-down), at 1.3055 (Boll Midline), at 1.3116 (Reaction high), at 1.3133 (daily envelope), at 1.3294 (Reaction high). The pair is in neutral conditions. USD/JPY On Wednesday, USD/JPY started trading in Asia in the 99.50 area. The decline on the stock markets in Europe triggered a first selling wave with the pair testing bids in the 98.30 area. In the US, the dollar held up rather well against the yen despite the poor US eco data, but the steep losses on the US stock markets caused a new sell-ing wave. The pair closed the session at 97.97, compared to a 99.70 close on Tues-day. The daily loss is ‘logic' but no really huge, given the negative stock market per-formance. This morning, the BOJ minutes of the early October meeting showed that the gov-ernment incited the Bank to join international action to address the financial crisis, but at that time the bank apparently didn't consider a rate cut yet. Growing market stress and a quick deterioration in the (global and Japanese) economic outlook later last month made the Bank to change his mind. Overnight, the pair shows some addi-tional losses, in step with the equity sell-off in Asia this morning. On the charts, global market stress hammered the pair through the key 103.50 range bottom early October and the pair set a new reaction low at 90.93 two weeks ago. An easing in global market tension sparked an USD/JPY rebound with the pair reaching a reaction high in the 100.55 area early this week. Recently, we were neu-tral on USD/JPY. However, over the previous days, the 100.55 reaction high, proved a hard nut to crack short-term. With market nervousness still high and the global eco picture still awful, a sell-on-upticks approach for return action lower in the 101.55 to 90.93 range is favoured. USD/JPY: off from the recent highs Support stands at 97.58 (St low), at 96.85 (38 % retracement), at 96.34/06 (Reaction lows hourly) at 94.48/24 (Break-up/Boll Bottom). Resistance comes in at 98.37 (ST high), at 99.44/67 (Reaction high/Daily envelope), at 100.55 /56(ST highs), at 100.77/80 (50% retracement/weekly envelope) and at 101.13 (LTMA). The pair is in neutral territory. EUR/GBP Yesterday, EUR/GBP showed again some rather wide intra-day swings but at the end of the day EUR/GBP was little changed. At first, the steep gains from Tuesday and the pair coming close to key resistance caused some short-term profit taking. The poor UK eco data (collapse in the services PMI and disappointing production data) at that time only had a very limited impact on sterling trading and EUR/GBP set an intraday low in the 0.8050 area early in US trading. Sharp, order-driven, swings in cable were behind this move. However, with the uncertainty on the BOE interest rate decision looming, sterling couldn't hold on to its gains and later in US trading EUR/GBP recouped the early losses to close the session at 0.8146, little changed from the 0.8134 close on Tuesday Today, all eyes in the market will be on the ECB and probably even more on the BOE interest rate decision. As is the case for the ECB, a 50 basis point rate cuts looks like a done deal. However, even more than for the ECB the risk is for the BoE to take more bold action. In theory, a more aggressive BoE interest rate cut could be sterling negative. However, with markets/investors desperately looking for decisive action to stop the bleeding for the economy, we're far from convinced that a 75 or even a 100 basis points rate cut would lead to a sharp sell-off of the sterling against the single currency. Already for some time, we advocate that we don't see the need for a sustained comeback of the sterling against the euro based on the eco (and financial) picture in both areas. Our view came under pressure two weeks ago with EUR/GBP exten-sively testing the key 0.77 support area. However, the range held and the pair in ex-tremely volatile trading even revisited the highs in the 0.8200 two weeks ago. The pair currently comes close to the top of this sideways trading range. To assess the market reaction on today' BoE interest rate decision, we take a close look at the technical picture. An aggressive rate cut might be a good reason to extensively test the top of the sideways range in the 0.8200 area. For now, we still prefer a scenario of no sustained break above this key level. Our cut-off point is the 0.83 area. Sus-tained trading above this level would suggest that a new sterling selling could be in the making EUR/GBP: all eyes on the BoE Support stands at 0.8107 (Reaction low hourly), at 0.8067/58 (Daily enve-lope/STMA), at 0.8043/32 (Reaction low) and at 0.8018 (Reaction low) and at 0.7972 (MTMA). Resistance is seen at 0.8144/54 (Boll Top/ST high), at 0.8164 (Week high), at 0.8189/97 (Daily channel bot-tom/reaction high), at 0.8229 (Daily envelope) and at 0.8273 (Starc top). The pair is in overbought territory. News US: ADP employment crashes In October, the ADP employment report showed employment falling 157K, a much larger drop than expected and the largest since December 2001. The previous month was also revised down from -8K to -26K. Since October last year, the ADP report has been consistently on average around 90K better than the Payrolls report. This would point to a loss of around 250K in the US Payrolls report on Friday, which would be in line with losses registered during previous recessions. Similar to the drop in the ISM manufacturing, the ISM non-manufacturing deterio-rated sharply in October. The headline index fell to a below consensus 44.4 from 50.2 previously. While the series hasn't yet a long history, it is the lowest on record, slightly below the trough reached in the 2001 recession. The details show losses in most important sub-indices. Price pressures are also easing fast. EMU: Services PMI revised down In the final report, the October services PMI was revised down from the pre-liminary 46.9 to 45.8, a 10-year survey low. The downward revision indicates that in the two weeks between the flash and final report conditions in the services sector have further deteriorated. Among the EMU countries hit the hardest, Spain (32.2) and Ireland (36.1) again startle the eye, but also in Germany the index has fallen now below the 50 level at 48.3. In September, the euro zone retail sales fell by 0.2% M/M and 1.6% Y/Y. Although, the decline was slightly less than expected, the deterioration of the labour market and decline in real wages suggest that little improvement should be expected over the coming months. Other: Horrible UK services PMI raises rate cut expectations In the UK, the services PMI showed business activity in the important services sector shrinking at its fastest pace in the 12-year survey history, as the index fell to 42.4 in October from 46.0 in November. Activity in the sector is now seen con-tracting for the sixth consecutive month, and even more worryingly the forward-looking components suggest little improvement in the months ahead, as the incom-ing new business (40.1) and outstanding business (39.3) decline even faster. The in-creasingly difficult economic environment has however eased price pressures, as both input prices (58.1) and prices charged (51.6) slowed. Also in the industrial sector, activity is slowing rapidly. Output declined for the fifth consecutive month, notably by 0.2% M/M and 2.2% Y/Y in September. The situation in the manufacturing sector is even worse with production falling for the seventh month in a row by 0.8% M/M and 2.3% Y/Y. On a quarterly basis, industrial and manufacturing production is down by respectively 1.1% and 1.3% Q/Q. Hence, both pieces of eco data confirm that the UK economy is currently in re-cessionary territory with little indication of a quick recovery. Within this envi-ronment, inflation can be expected to drop sharply over the coming months, which opens the door for more aggressive rate cuts when the MPC meets tomorrow. 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.