Euro Cannot Sustain Its Rally

Daily Forex Fundamentals | Written by KBC Bank | Nov 27 08 09:13 GMT |

Sunrise Market Commentary US Treasuries continue their bull run despite strong equities: 10-year yield below 3%!! The inverse correlation between Treasuries and equities, driven by investors' risk aversion/appetite motives remained broken, as both rallied higher yesterday. Data were weak, often still weaker than expected, but it hadn't a direct impact on trading. We suspect that more hedging activity following the Fed's latest measures remained an important factor, together with the feeling that a quantitative monetary policy may be just around the corner. 10-year yield closed below 3% for the first time ever. Today, US markets are closed in observance of Thanksgiving. German 10- and 30-year yields fall to new cycle lows, but next support levels loom Yesterday, yields fell quite substantially across the European yield curve with the 30-year sector outperforming. Both 10- and 30-year yields closed at new cycle lows at respectively 3.28% and 3.78 and are currently testing the January 2006 lows. A sustained break lower would bring the all-time lows at 3% and 3.47% in the picture. Euro cannot sustain its rally Despite weak US data, stronger equities and higher oil prices, EUR/USD fell lower yesterday losing the 1.30 level. However, it might have been just profit taking. The Sunrise Headlines US Equities ignored the weak economic data and ended convincingly higher. S&P presented the biggest four-day rally since 1933. Asian stocks rise as investors supported the bigger than expected Chinese rate cut. At least 101 people were killed in blasts and gun attacks across south-central Mumbai late on Wednesday evening. India halted stocks, bonds and the rupee trading today. German Chancellor Angela Merkel accused the US and other governments of making 'cheap money' a central tool of their economic management and thus risking a similar crisis in five years. Woolworths, the British variety store chain, fell into administration, putting more than 30 000 jobs at risk in the UK. The Polish Central Bank unexpectedly cut its key interest rate by 25 basis points on signs that the Polish economy is facing a sharp slowdown caused by the global financial crisis. General Motors is studying whether to shed its Saturn, Saab, Pontiac and Hummer brands to cut costs to win $12 billion in government loans. Crude oil ($53.25) rose on Wednesday as OPEC may cut production in Cairo on Saturday to support the oil price. Today, the calendar contains euro zone M3 money growth, European Commission economic confidence and German unemployment figures. US markets are closed. Currencies: Euro Cannot Sustain Its Rally EUR/USD On Wednesday, EUR/USD reversed course following a three-day winning streak that got a boost on Tuesday after the publication of the Fed stimulus package. The pair ultimately closed at 1.2880 compared to Tuesday's closure at 1.3064. Profit taking in the pair started right at the start of Asian trading and a shy attempt in European trading to regain the 1.30 area failed miserably. This was a bad omen for the euro that was well captured by traders, who pushed the pair further down early in the US session. US data as Chicago PMI business sentiment, final Michigan consumer sentiment and especially durable orders and household spending were again very weak, but didn't weigh on the dollar. The announcement of a €200 billion EU stimulus package left no traces on the EUR/USD charts. The amount of the plan is probably ok, but the lack of coordination and its implementation through the Member States instead through the EU is a negative that may dent the impact of the plan. At margin, the lack of coherence of the plans across Member States might even be slightly euro negative short-term. US oil inventories came out very high, but could however only very temporarily push oil prices lower, later on oil prices rallied to close up 3.67 dollar. However, also oil prices couldn't prevent some further EUR/USD losses. Later in the session, the equity rally gave EUR/USD some downside protection, but it could lift the pair only very modestly to a 1.2880 in the close. Summarizing, the market considered that the recent rebound in EUR/USD had gone far enough ignoring traditionally euro positive factors like higher oil prices, stronger equities and a fiscal stimulus package. Today, the US markets are closed, In Europe, the EU economic confidence indicators are on the agenda, but these should only confirm that the EMU economy is in dire straits as numerous eco report stated recently. The euro started on a stronger footing in today's trading, currently changing hands at 1.2924. Trading will be thinned by the absence of US traders. The terrorist attacks in India have little impact on trading. 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. Yesterday's price action doesn't fit in this search for a new trading theme. Nevertheless, it might have been profit taking and 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? EUR/USD: Profit taking on euro rebound. Support comes in at 1.2869 (STMA), at 1.2836 (daily envelop), at 1.2819/03 (reaction lows hourly), at 1.2728/18 (Boll Midline/Break-up hourly) and at 1.2695 (MTMA). Resistance is seen at 1.2978 (reaction high hourly), at 1.3026/44 (reaction high/breakdown hourly), at 1.3081/86 (week high/daily envelop), and at 1.3116 (05 Nov high). The pair is slightly overbought USD/JPY 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 yesterday'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. (Stoploss on EUR/USD shorts). Yesterday, USD/JPY traded mostly sideways, closing slightly up at 95.67 from 95.22 at the end of Tuesday's session. During Asian, European morning and early US trading, the pair traded sideways, but with a negative bias. The 95.22 closing level capped the upside, but the rally of US equities after a weak opening gave the pair enough stimulus to move higher, albeit modestly and from a technical point of view insignificant. It shows though that the risk aversion/appetite motive is still a driver for the pair. This morning, the yen is regaining some ground trading again close to the 95.00 level. There were no data releases, while the minutes of the BoJ meeting weren't really surprising. We retain that BoJ member Mizuno called for steady rates at the meeting the board decided to cut rates by an unusual 30 basis points. It seems three members proposed a 25 basis points rate cut. The terrorist attacks in India seem to have only a very modest impact on trading. Asian equities are mostly higher (Indian markets are closed), and even the Indian rupee is only slightly lower versus the dollar. 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 remains intact. We are holding to a sell-on-upticks approach as long as the pair holds below 100.55. Yesterday, we suggested that the (upward) correction in USD/JPY could go further if risk aversion eased further, but yesterday's price action was disappointing from a dollar point of view. The USD/JPY downtrend remains very well in place. USD/JPY: down-trend remains intact Support stands at 94.66/58 (daily envelop/week low), at 9440 (MT reaction low), at 93.97 (Boll bottom), at 93.55/46 (Last Week low/LT breakup hourly. Resistance comes in at 95.99/9608 (breakdown hourly/MTMA), at 96.67 (reaction high hourly), at 96.87/96.97 (daily envelop/Boll midline/channel top), and at 97.43 (week high). The pair is neutral territory EUR/GBP On Wednesday EUR/GBP basically held a sideways trading pattern in the 08520/80 area, except for a very brief spike lower during the US trading hours. The details of UK Q3 GDP brought no new insights for the currency markets and EUR/GBP didn't react to the EU stimulus package. So, after all it was a rather uneventful day for EUR/GBP trading, but with sterling closing a bit stronger at 0.8446 compared to 0.8443 on Tuesday. From a technical point of view, the drop below the medium term moving average at 0.8428 (today) makes us a bit nervous and the inability to recapture the level today may point that sterling strength has to go further. Today, UK housing prices (Nationwide) fell much less than expected, which in a UK perspective might be an important feature, if confirmed in the next months and in other surveys. However, the pair fell in the minutes before the release recouped these losses immediately following the release. In EMU, economic confidence indicators are on the agenda, but these should only confirm that the economy is in dire straits, something numerous eco report stated in recent days. So, all in all trading in EUR/GBP may be technically inspired today, but the absence of US traders may bring more volatile intra-day moves. 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 the drop below MTMA (see above) might be an indication that this level will be tested. The pair must return below the 0.8215/53 area (Break-up/uptrend line) to call off the sterling red alert. EUR/GBP: will it test the 0.88335 level (neckline double top)? Support stands at 0.8359 (week low), at 0.8334/20 (Reaction low/Weekly envelope/neckline double top/daily envelop), at 0.8292 (38% retracement). Resistance is seen at 0.8428/40 (MTMA broken/STMA), at 0.8484/93 (daily envelope/reaction high/breakdown hourly) and at 0.8568 (Reaction high). The pair is in neutral territory. News US: durables show that firms are slashing sales In October, durable goods orders came out surprisingly weak, dropping 6.2% M/M, while the consensus expected a drop of 3.0% M/M. The previous figure was sharply downwardly revised from 0.8% M/M to -0.2% M/M. The less volatile durables ex transportation fell 4.4% M/M and the September figure was downwardly revised from -1.1% M/M to -2.3% M/M. Orders for transportation (-11.1% M/M) and primary metals (-12.6% M/M) plunged sharply, but also machinery (-6.8% M/M) and electrical equipment (-5.3% M/M) showed significant declines. Shipments of non-defence capital goods less aircraft, which is a good predictor of business investment in equipment & software, fell 2.4% M/M after rising 1.6% M/M in August. These data confirm the very bleak outlook for the US economy as companies are cutting their sales. In October, new home sales fell 5.3% M/M to 433 000, while an outcome of 441 000 was expected. The previous rebound was downwardly revised from 2.7% M/M to 0.7% M/M. Regional data show that sales were rising in the Northeast (38 000 from 31 000) and Midwest (71 000 from 67 000), while sales were lower in the South (233 000 from 248 000) and West (91 000 from 111 000). The number of homes for sale dropped from 414 000 in September to 381 000 in October, while months' supply rose from 10.9 to 11.1. The October housing data indicate clearly that a recovery in the housing market is not yet around the corner. In the week ended November 22, initial claims dropped 14 000 from an upwardly revised 543 000 to 529 000. The consensus was looking for a slightly higher figure. Continuing claims, which are reported with a one-week lag, showed an unexpected plunge (-54 000) from an upwardly revised 4 016 000 to 3 962 000. Although the unemployment claims were lower than expected, it would be ridiculous to conclude that the labour market is improving as the decline might be due to the pattern of seasonal adjustment factors. Chicago PMI dropped to 33.8 in November, while only a marginal decline was expected. Looking at the details, new orders (27.2 from 32.5), order backlog (28.2 from 39.0), inventories (41.2 from 56.5) and employment (33.4 from 41.5) showed significant declines, while production and supplier deliveries improved slightly. Prices dropped from 53.7 to 50.7, after a sharp drop in October. This outcome raises fears that national manufacturing ISM will show another drop in November. Personal spending dropped 1.0% M/M in October, which is in line with the expectations. The weakening was due to a 4.04% M/M plunge in durables and a 2.54% drop in non durables. Personal income came out slightly higher than expected rising 0.3% M/M and the savings rate rose 2.4% M/M (from 1.0% M/M). The final figure of Michigan consumer confidence surprised on the downside coming out at 55.3, compared to 57.9 in the first estimate. Both economic conditions (57.5 from 61.4) and economic outlook (53.9 from 55.7) deteriorated, which is in sharp contrast with the conference board consumer confidence indicator, released on Tuesday. 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.