Currencies Trade Sideways

Daily Forex Fundamentals | Written by KBC Bank | Nov 28 08 08:12 GMT |

Sunrise Market Commentary US Treasury trading resumes Trading will remain thin on black Friday, but sentiment in the Treasury market remains bullish with new highs in the overnight session. Despite this bullish climate, we are cautious and understand investors that are looking to book profits. Awful eco data increase pressure on ECB to cut rates by more than 50 bps Yesterday, European yields moved slightly higher, except at the 30-year segment. Both 10- and 30-year yields are still close to important support levels at respectively 3.23% and 3.78%. At the short end, recent awful eco data may push 2- year yields again lower, as the pressure on the ECB to cut rates by more than 50 bps next week is building. Currencies trade sideways The main currency pairs hover listless in tight ranges, waiting for new developments. These aren't expected for today, but next week, fresh key US eco data and many central bank meetings will offer more perspective for fireworks The Sunrise Headlines Most Asian stocks markets advance led by financials. Nikkei ends 1.66% up as gains were limited by Panasonic that slashed its operating profit forecast by 40%. Japan's industrial output and household spending dropped more than expected in October, which indicates that companies were slashing production rapidly and consumers scaling back their spending. India's economy grew 7.6% in the third quarter, the slowest pace since 2004, which increases pressure on the central bank to cut rates. India's Prime Minister Manmohan Singh blamed Pakistan for the terrorist attacks in two Mumbai luxury hotels. Ping An Insurance is asking help from the Chinese government to seek compensation from Belgium over its Fortis losses after the group was nationalized. Crude oil ($53.40) declines slightly after markets were closed yesterday. This weekend OPEC holds an informal meeting in Cairo and are set to weigh another round of steep production cuts. Today, the calendar contains the euro zone CPI data and CBI distributive trades report.. Currencies: Currencies Trade Sideways EUR/USD On Thursday, EUR/USD lingered in a relative tight sideways range of 1.2860 to 1.2960 to take the extremes, closing at 1.2904, up 24 ticks from Wednesday's close. The absence of US traders was certainly responsible for the dullness of trading. There were a number of timid attempts by the euro bulls to push EUR/USD higher again following Wednesday's downward correction, but they lacked dash, conviction and ultimately convinced traders it made no sense to insist further. So the pulse weakened throughout the session and the range became ever tighter. The European eco data, notably the EU Commission economic confidence data and the retail PMI's echoed the message of deep recession that has become so common in recent days and weeks. However, it left currency markets unmoved. EUR/USD (3 days): Boring sideways trading on Thursday might be prolonged today. Support comes in at 1.2856 (reaction low hourly/LTMA), at 1.2818/03 (reaction lows hourly/daily envelop), at 1.2799 (neckline double bottom hourly), at 1.2723/18 (MTMA/Breakup hourly) and at 1.2640 (break up daily 21 Nov). Resistance is seen at 1.2967/78 (reaction highs hourly), at 1.3044/56 (breakdown hourly/daily envelop), at 1.3081 (week high), and at 1.3100/16 (Bollinger top/05 Nov high). The pair is slightly overbought. USD/JPY Today, the US markets are open, but many trading desks will be near empty and real money investors probably won't be active either. Overnight, trading in the EUR/USD pair remained lackluster, keeping the pair close to the 1.2915 where it is changing hands currently. No eco releases in the US today, while in EMU, the dataflow is light. The November HICP inflation is expected to have dropped to 2.4% from 3.2%, but following the release of the German and Belgian inflation, the risks are firmly on the downside of expectations. This might lead to more talk about the size of the ECB rate cut that will be decided next Thursday. At least, a majority inside the ECB Shadow Committee, voted in favour of a 100 basis points rate cut, but recently a number of ECB governors indicated that they should keep their minds cool and cut rates in a more 'normal' way, insinuating that they prefer a 50 basis points rate cut. Nevertheless, the risks seem to be for a 75 basis points cut. While lower rates are often a negative for the currency, in the current environment this relationship carries less value. Negative eco news and risk avers investor behavior have supported the dollar (and the yen) at the expense of the euro during several weeks, even months. This theme was the main factor behind the decline of EUR/USD from highs above 1.60 to the correction low in the 1.2330 area. Since end October, the EUR/USD pair has developed a consolidation pattern between 1.2330 and 1.3294. Until recently, the correlation between EUR/USD and indicators of risk aversion and economic had remained relatively high, but the euro gradually showed more resilience. Over the previous days, we suggested that markets may start looking out for another trading theme, which by hypothesis would be less USD supportive. Therefore alertness for a change in trading theme remains warranted. Do the aggressive measures of monetary easing become a negative factor for the dollar or will EUR/USD continue to trade in line with the swings in global risk aversion? From a technical point of view, during the last three weeks, EUR/USD has established a sideways trading pattern. The charts suggest the EUR/USD trend is negative longer term. However, over the past week; we indicated to take partial profit in case of return action towards the bottom of the range as chances were rising for a more pronounced EUR/USD rebound. After Wednesday's EUR/USD correction, the jury is still out as EUR/USD is now again in the middle of its sideways range. Shortterm players may still look to sell EUR/USD on a return action towards the top of the range (1.31/32 area). A sustained break above the 1.3294 area would be an important technical signal of a change in the USD constructive market sentiment. (Stop/loss on EUR/USD shorts). Yesterday, also USD/JPY traded essentially sideways, closing down about half a yen at 95.19. Intra-day, the pair slid during the Asian session, only to slow move higher again in the European session. It is tempting to offer well supported equities and thus a return of risk appetite as an explanation for the slight dollar gains, but that looks stretched. Overnight, the price action remained sideways oriented with USD/JPY currently quoted at 95.34. Equities are moving moderately higher, while eco news remained gloomy. Especially weakness in industrial production, down 7.1% Y/Y, falling car production (-6.8% Y/Y) and negative retail sales (-0.6% Y/Y) caught the eye and confirm that the economy will remain in recession. Tokyo Inflation data were close to expectations, but the core measure (excl. food and energy) fell to 0.2% Y/Y while the measure excluding only fresh food fell to 1.1% from 1.5% Y/Y previously, suggesting that deflation may once again a fact of life for Japanese policymakers. The unemployment rate dropped unexpected to 3.7% from 4% previously, but our favourite indicator, the job-to-applicants ratio fell further to 0.80 from 0.82, suggesting that labour conditions are worsening. In the face of these grim data, Fin Min. Nakagawa said that he wants the BOJ to consider more steps to help the economy, stimulating a return to a zero rate. However, as the yen thrives by bad eco news and risk aversion, neither bad eco data nor the speculation on zero rates is a yen negative. We expect more sideways trading today. Looking at the charts, global market stress hammered the USD/JPY cross rate through the key 103.50 range bottom early October and the pair set a new reaction low at 90.93 four weeks ago. A temporary easing of global market tensions sparked a USD/JPY rebound. The pair set a reaction high in the 100.55 (Nov. 04), but the rebound ran into resistance. Longer-term, the scenario of a well supported yen on the idea that prospects for a sustained improvement in the global economic picture remain very downbeat is intact. We are holding to a sell-on-upticks approach as long as the pair holds below 100.55. The USD/JPY downtrend remains very well in place, despite some improvement in equity markets. . USD/JPY: down-trend remains intact, but no momentum in the pair for now Support stands at 94.97 (reaction low), at 94.58/40 (week low/MT reaction low hourly/daily envelop), at 93.83 (Boll bottom), at 93.55/46 (Last Week low/LT breakup hourly). Resistance comes in at 95.92/99 (MTMA/breakdown hourly), at 96.23 (daily enverlop), at 96.81 (Boll midline/ channel top), and at 97.43/62 (week high/LTMA). The pair is neutral territory EUR/GBP On Thursday, EUR/GBP fell for the third consecutive session, as the pair tested the neckline of a potential double top at 0.83.34. However, the level held and the pair moved slightly higher, but without regaining Wednesday's closing level. The losses were contained though. There were no indications that the weak EMU eco data were behind the slight fall of the pair. It looked technically driven. In this respect, the inability of the pair to recapture the medium term moving average at 0.8445 (today) makes us think that the upside is capped in the very short term. Overnight, UK consumer confidence was reported unexpectedly up to a still very low -35 from -36 in October, but the rise is insignificant and doesn't change the outlook for household spending. Later today, the distributive trade survey will give us an update about the development of retail sales. The omen isn't good. The weekly John Lewis retail sales figures showed another weekly decline in sales, the eleventh in a row, while the Woolworth and Kingfisher news was downbeat too. We will look closely to the reaction of sterling following the release. The aggressive BoE rate cut three weeks ago and their negative assessment of the UK economy triggered an aggressive sterling selling wave. The quick loss of interest rate support and the very negative outlook for the UK economy have caused sterling to lose a lot its attractiveness. The break above the high profile 0.8200 resistance area has made the technical picture outright negative for sterling/positive for EUR/GBP. After the sterling crash two weeks ago some correction/consolidation has kicked in. Longer-term the risk is for additional sterling losses. The tentative signs of bottoming out at the end of last week were confirmed earlier this week. The price action on Tuesday and Wednesday was disappointing though. Nonetheless, we hold on to our cautious buy-on-dips approach for EUR/GBP. A drop below 0.8334 would be a warning signal for our ST EUR/GBP positive bias, but at least yesterday the test failed. So we will be curious whether this will be enough of a signal for euro bulls to try the upside again. A break above the MTMA (see above) is needed to open the upside though. Longer term, the pair must return below the 0.8215/53 area (Breakup/ uptrend line) to call off the sterling red alert. EUR/GBP: Test the 0.88335 level (neckline double top) failed yesterday Support stands at 0.8364 (reaction low hourly), at 0.8345/34 (week low/Reaction low/neckline double top/daily envelop), at 0.830 (weekly envelop), and at 82.92 (38% retracement). Resistance is seen at 0.8396/0.8407 (reaction highs), at 0.8421 (daily envelop/ STMA), at 0.8438/45 (reaction high/broken MTMA) and at 0.8484/93 (daily envelope/reaction high/breakdown hourly). The pair is in neutral territory. News EMU: Economic sentiment falls to 16-year low The European Commission confidence indicators showed another weakening in November. Economic confidence dropped from a downwardly revised 80.0 to 74.9, while a figure of 78.0 was expected. The weaker than expected figure was due to a sharp deterioration in industrial confidence (-25 from -18) and services confidence (- 12 from -7), while consumer confidence showed only a marginal decline (-25 from - 24). Economic confidence is now at a 16-year low, which is in line with the other European confidence indicators and confirms the very bleak outlook for the euro zone economy. The business climate indicator plunged from -1.34 to -2.14 in November, the lowest figure since 1993. In Germany, the number of people unemployed fell 10 000 in November. The consensus estimate was looking for a decline of 5 000. The number of jobs created rose from 22 000 in September to 37 000 in October, while the number of vacancies stabilized at 563 000. These data indicate that employment keeps up rather well, but labour market conditions are expected to worsen in the coming months. Euro zone money supply growth came out higher than expected in October. On a yearly basis, M3 money supply rose 8.7% Y/Y, while the consensus was looking for an outcome of 8.1% Y/Y. The previous figure was upwardly revised from 8.6% Y/Y to 8.7% Y/Y. Looking at the details, bank lending to the private sector slowed from 8.5% Y/Y to 7.8% Y/Y. Growth in household lending declined to 3.3% Y/Y (from 3.8% Y/Y) and loans to non-financials showed a moderate slowing (11.9% Y/Y from 12.2% Y/Y). The higher than expected figure was due to a sharp increase in M1 (3.7% Y/Y from 1.2% Y/Y), which might be due to increased turmoil in financial markets, which has increased demand for cash. 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.