EUR/USD Continues To Fight An Uphill Battle

Daily Forex Fundamentals | Written by KBC Bank | Nov 04 08 08:25 GMT |
Sunrise Market Commentary

* US Treasuries start the week on a strong footing
In a very thin market, Treasuries rallied even before awful ISM, disastrous car sales, a stunning Senior Loan officers' survey and dovish comments of Fisher hit the newswires. The curve steepens to new highs. Today, we expect again thin trading as the calendar is unexciting and the presidential results won't be published until well after closure.
* Intra-EMU spread widening increases calls for a single European government bond issuer
Yesterday, European bonds rallied higher, but surprisingly the short end lagged the longer end of the curve. This may be related to the huge supply centred at the short end this week, which also fuelled a further widening of the intra-EMU spreads and increases the calls for a single European government bond issuer.
* EUR/USD continues to fight an uphill battle
EUR/USD continues to lose ground. Overall economic uncertainty and the expectation that the ECB will also be forced to execute aggressive rate cuts weigh on the single currency. In this context, awful US eco data fail to give the euro any lasting support. For now, the US presidential elections have hardly any impact on currency trading.

The Sunrise Headlines

* US equities close little changed in a thinly traded session, as investors stayed sidelined ahead of elections and the payrolls report. Japanese stocks sharply up following a market holiday, but other Asian equities mostly moderately down.
* Reserve Bank of Australia cut rates by a bigger-than-expected 75 basis points to 5.25%, but the Aussie moves very little. Move raises expectations about the size of the rate cuts in Europe.
* Car sales drop substantially in Japan, US and Italy, as consumer retrenches, contributing to recession fears.
* US banks tightened lending conditions across the board according to the Fed Senior Loan Officers report.
* EU Commission says EMU and EU-15 is in technical recession, slashes 2009/10 growth forecasts and calls for coordinated action.
* WTI Crude (63.40 $, -4 $ on the day) slide sharply, closing in on cycle lows, as recession fears intensify. Brent Crude trades below 60 $, effectively testing lows.
* US presidential election lonely focus for markets today.

Currencies: EUR/USD Continues To Fight An Uphill Battle
EUR/USD

On Monday, EUR/USD again delivered a disappointing performance. The pair traded in the high 1.28-area early in the European session, but there was again no room for further gains of the single currency despite a decent start on the European stock markets. The EU commission in its autumn forecasts painted a very bleak picture for the European economy for the second half of 2008 and going into 2009. This only confirmed the market feeling that the single currency will continue to lose interest rate support in the near future as even the ECB will be forced to execute aggressive interest rate cuts, starting with this week's meeting. However, later in the session, the US ISM manufacturing index came in at an awful 38.9, suggesting that the US heading for a deep recession, too. However, at that time this release failed to give EUR/USD any lasting support. On the contrary, EUR/USD extended and even accelerated the intraday decline that started early in US trading and closed the session at 1.2643, compared to 1.2726 on Friday. The steep decline in the oil price apparently is still an important guide for EUR/USD trading, as the eco data fail to set the tone for trading at the current juncture.

Overnight, the dollar only extended its rebound, or probably even better, the euro extended its decline (USD/JPY lost ground in Asia) and the pair trades in the 1.26 area at the moment of writing.

For today, the US presidential elections will dominate the headlines on all news wires. However, the least one can say is that the election, just like the eco data, until now had hardly any impact on (currency) trading and we don't see any reason why this should change today. In case of an Obama/democratic victory, a more stimulating fiscal policy (and thus less room for monetary easing) in theory could be dollar positive in a first stage, but we wouldn't give much weight to this argument at the current juncture. With the outcome of the election only available tomorrow morning, one might expect investors to keep a wait-and-see attitude. The market focus will probably remain with the economic crisis and the interest rate cuts that will be executed in the days and weeks to come. At least in the recent past, this focus on the global crisis proved to be a negative factor for the single currency.

We advocated 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 remains intact. Shorter-term, following the rebound of the pair last week, we think that the pair is looking for some sideways trading that might develop within the boundaries of 1.231 and 1.3297. Indeed, the EUR/USD rebound ran out of steam around the first key resistance level at 1.3259, previous low, which we singled out as a potential entry point in a sell euro-on-up-ticks.

From a technical point of view, EUR/USD since the last week of September tumbled 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 reaction low in a sustainable way to get a first indication that pressure is easing. Such a move looks very difficult for now. The short-term trend in EUR/USD is again down with the 1.2330 reaction low the most obvious short-term target. A break below this level could put the trigger for an additional down-leg.

EUR/USD: sliding lower in the range

Support comes in at 1.2727 (today low), at 1.2470 (Daily envelope), at 1.2439 (Daily stop and reverse), at 1.2344/31 (Weekly Bollinger bottom/ reaction low) and at 1.2300 (2nd target channel break).

Resistance is seen at 1.2649 (Reaction high), at 1.2768 (STMA), at 1.2831/67 (daily envelope/MTMA), 1.2898 (Reaction high), at 1.3006 (Weekly envelope).

The pair is in neutral conditions.
USD/JPY

On Monday, USD/JPY again showed some wild intraday swings. However, as the Japanese markets were closed one should be cautious to draw firm conclusions from yesterday's price action. The pair was sold at the start of the US trading session, maybe due to the ongoing negative global economic sentiment, but remarkably, the pair gained ground later in US trading, despite a very weak US manufacturing ISM and a rather lackluster US stock market performance. So also for this pair, we didn't see much of a strong economic logic to explain yesterday's price action. Trading again was mostly inspired by technical factors. The pair closed the session at 99.12 compared to 98.46 on Friday.

Today, Japanese markets restart trading after yesterday's holiday. The Nikkei showed quite an impressive gain (more than 6% at the moment of writing). However, even this positive news fails to give USD/JPY a strong boost. The pair even trades slightly lower compared to the close yesterday evening.

Later this week, the calendar in Japan is thin, but the minutes of the BOJ meeting will get quite some attention. In the US, the eco calendar is important (Payrolls) and should confirm the US is in recession. An eventual post-election equity rally on the contrary should be yen negative.

On the charts, global market stress hammered the pair through the 103.50 range bottom three weeks ago and the pair set a new reaction low at 90.93 on Friday two weeks ago. Recently, we were not fond of buying yen on the argument of extreme stress, as the yen may rapidly lose ground if the financial markets stabilize and the past sessions show the argument isn't totally unfounded, even if we admit that in a longer term perspective, the yen did very fine and was the world outperforming currency. Even on the recent stock market rally, the losses for the yen should be considered as rather contained (except for the spike on Tuesday last week). Short term, we are neutral for USD/JPY and the pair may consolidate in the wide 99.70/101.30 to 90.93 range with risk aversion/appetite the driver. In a day-today perspective, we have the impression that the upside becomes more difficult.

USD/JPY: rebound loses momentum ahead of first key resistance

Support stands at 99.28/20 (Broken MTMA/Week low, at 97.68 (daily envelope), at 96.34/06 (Reaction low hourly), at 94.91/07 (reaction low hourly/Break-up).

Resistance comes in at 99.34 (ST high), at 0.9964/70 (ST high / 29 Oct reaction high), at 100.07 (First Cwave) and at 100.77 (50% retracement/ weekly envelope).

The pair is in neutral territory.
EUR/GBP

EUR/GBP traded extremely volatile over the last two weeks and this pattern hasn't changed yesterday. The pair traded in the 0.7850 area at the start of European trading, but the sterling was again sold quite aggressively throughout the European trading session. The UK manufacturing PMI came out at a low 41.50, but the outcome was even slightly better (less worse) than expected. However, this didn't prevent some market watchers to speculate on an aggressive BOE rate cut later this week and this weighs on the sterling. EUR/GBP closed the session at 0.7990, compared to 0.7921 on Friday. Overnight, the sterling lost further ground as EUR/GBP trades in the 0.8035 area at the moment of writing.

Today, the UK calendar contains the October PMI construction survey. However, this release is no market mover. Eco news is recently also less important in trading, that seems to be mostly order-driven, as the economic situation in the UK is maybe worse than in Euroland, but not so different. Regarding the rate decisions, in both countries a 50 basis points rate cut is expected, but some analysts are going in the UK for a bigger cut. We have no strong opinion on it. However, a steeper-thanexpected rate cut in the UK may have some impact on the sterling.

Already for some time, we advocated 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 extensively testing the key 0.77 support area. However, the range held and the pair in extremely volatile trading even revisited the highs in the 0.8200. Longer-term we think that the established sideways trading pattern between 0.7700 and 0.81/82 can hold in the foreseeable future. In a day-to-day perspective, we put the risk for EUR/GBP on the upside due to lingering uncertainty on the amount of Thursday's rate cut.

EUR/GBP: Volatile, but still in range.

Support stands at 0.7973 (Reaction low), at 0.7945/41 (Break-up/STMA), at 0.7929 (Break-up daily), at 0.7904 (Daily envelope), at 0.7839/07 (Yesterday low/last week low).

Resistance is seen at 0.8052/58 (Boll Top/ST high+ daily envelope), at 0.8086 (MT reaction high), at 0.8107 (Weekly envelope), at 0.8123 (Last week high) and at 0.8197 (Reaction high).

The pair is in neutral territory
News
US: Manufacturing sinks further in the morass

The October ISM report confirmed what the regional manufacturing surveys had suggested: the US manufacturing industry is in dire straits and the overall economy is slipping deeper into recession. Levels below 50 mean contracting in activity of the sector, while econometrical studies put the boom/bust level for the overall economy at 41. The index is now at its lowest level since the double dip recession of 1980/82. The standstill in financial markets in the past six weeks has pushed the economy over the cliff. The headline, composite, ISM index dropped to 38.9 in October from 43.5 in September and 49.9 in Augustus. The details brought no relief: new orders shed 6.6 points to 32.2, production fell by a similar amount to 34.1 and backlog of orders dropped 5.5 points to a very low 29.5. Employment slid even 7.4 points lower to 34.6. Other sub-indices with the exception of inventories were lower too. A vicious spiral of lower orders leading to lower production and employment cutbacks, eating into demand generating another round of lower orders…. Is now well in place and should postpone any sizeable improvement in the months ahead. Interestingly, the sharp growth slowdown is together with plunging commodity prices easing inflationary pressures. The price index nose-dived to 37 from 53.5 in September and 77 in August.

September construction spending came out stronger than expected, but still at - 0.3% M/M (instead of -0.8% M/M expected). The August figure was revised to a rise of 0.3% M/M compared to an initial flat figure. Looking to the composition, residential spending fell by 1.3% M/M while non-residential spending was up 0.1% M/M. The outcome suggests that Q3 GDP will be slightly revised higher. However, there are still some figures missing (inventories/net export) that may still impact the Q3 GDP revisions.

Car sales tumbled another 17.9% M/M in October to 7.8 million units, the weakest face since 1983. The results are staggering and show how the credit crunch is affecting big ticket sales, credit availability and consumer confidence.
EMU: PMI drops even more

In October, the headline manufacturing PMI slumped to a new 11-year low of 41.1 from 45 previously, according to the final report. It has now been five months below the boom/bust level of 50 and suggests that the economy is in very bad shape. The outcome was below the 41.3 preliminary results published two weeks ago. Looking into the details, new orders fell 5.5 points to 36.3, while output fell 4.3 points to a 39.8 low. Most other activity data fell too. Interestingly, inflationary pressures are receding rapidly. Input prices fell a huge 12 points to 51.4, while out prices eased to 51.6 from 54.9 previously.

Looking to the various countries, the picture is uniformly bad, but Spain is one of the hardest hit countries in the region, with an new orders index below 30!!, dragged down by the bursting of its real estate bubble.
Other: UK PMI rebounds slightly from record low

In the UK, the October manufacturing PMI rebounded slightly from the record low at 41.2 in September to 41.5. Most activity indicators reflected the rebound, but the further decline in new export orders (43.5 vs. 44.0) indicates that the weakness of the pound is offering little relief now that the world economy is struggling as a whole. Input and output prices eased further, but

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