EUR/USD Revisits 1.30 After The Fed Announcement Of New Liquidity Measures

Daily Forex Fundamentals | Written by KBC Bank | Nov 26 08 08:26 GMT |

Sunrise Market Commentary US Treasuries rally, as Fed unveils more rescue programs The Fed added two facilities to its ever larger arsenal that should help this time Main Street by supporting the availability of consumer loans and by helping to bring mortgage rates down. Agency debt and spread products rallied, but more surprisingly, also Treasuries joined the party. European Community will issue 3-year bond to finance Hungary rescue plan (FT) Yesterday, the corrective flattening of the European yield curve continued, as 2-year yields extended their rebound on comments from the ECB, which pointed towards a 50 bps rate cut, while 10-year yields tracked US yields lower. Today, attention will be focused on the EU stimulus package as well as on the pricing of the 3-year bond of the EC. EUR/USD revisits 1.30 after the Fed announcement of new liquidity measures EUR/USD extended Monday's rebound. The gains occurred after the announcement of a new plan from the Fed to support the financing of the economic activity. USD/JPY also lost ground after the announcement. Is this a first sign of dollar weakness due to the aggressive monetary steps in the US? The Sunrise Headlines US Equities were unable to gain on the new $800 billion financial stimulus package. Stocks closed almost flat after a volatile trading session. Asian stocks trade mixed after Toyota's debt rating was cut from AAA to AA by Fitch. The US Fed announced new measures to revive the financial system. First, the Fed will buy op to $600 billion of mortgage bonds issued or guaranteed by government- sponsored housing enterprises such as Fannie Mae and Freddie Mac. In the other program, it will lend up to $200 billion to holders of AAA-rated securities backed by student loans, auto loans, credit card loans and small business loans. Today, the European Commission will unite on a plan to tackle recession even if it means busting the region's national deficit targets. The proposals explicitly cite the scope for further rate cuts and suggest a variety of possible stimulus policies. South Korea's top financial regulator recommended adopting the aggressive spending policies taken by other countries to cushion the economy from a global recession even if it means a budget deficit. Crude oil ($ 50.99) fell 7% on Tuesday despite the Federal Reserve's stimulus package. The calendar is again well-filled today with the German CPI figures, US durables, Chicago PMI, new home sales and weekly claims Currencies: EUR/USD Revisits 1.30 After The Fed Announcement Of New Liquidity Measures EUR/USD On Tuesday, EUR/USD showed very interesting price action. The pair hovered in a 1.2800/1.2900 trading range during morning trading in Europe. However it jumped from the 1.28 area to levels above 1.30 early in US trading. The move occurred after the Fed had announced two new facilities to encourage a better functioning of the credit markets. In this respect it is important to try to understand the driver behind this move. One explanation might be that the markets considered the measures as a positive step to support stability of the financial system and revitalize the economy. In the recent past, this kind of positive news tended to support EUR/USD. However, the reaction on the stock (and of the oil price) on those measures was rather muted and short-lived. In our view this creates some doubts on the reason behind the forceful jump in EUR/USD. At least part of the explanation could also be that markets grow a bit uncertain/nervous that the Fed is moving less to conventional measures. The fact that USD/JPY also lost ground after the announcement (USD/JPY is supposed to rise in case of global positive news) suggests that at least part of the move could be interpreted as dollar weakness rather than EUR/USD strength. On top of that, the move only indicates the Fed's determination to go far in the process of monetary easing while at the same time the ECB is holding on to a much more gradual approach. Also this is an ambiguous factor for currency trading (some will say that the ECB is behind the curve), but it could have played a role. Whatever the reason behind the move, EUR/USD for the second day in a row recorded a decent gain. The pair closed the session at 1.3064 compared to 1.2953 on Monday evening. Today, in Europe, the first German inflation data are scheduled for release. The EU will also publish its economic stimulus package. The US calendar is well filled with the durable orders, the income and spending data, the claims, the Chicago PMI, the Final Michigan confidence and the new homes sales scheduled for release. With such a long list of eco indicators, it is almost sure that at least one will bring some kind of surprise. Question is whether it will impact the currency market. Recently, global market sentiment has been the dominant factor EUR/USD trading. However, after yesterday's move, we are very keen to see whether something has changed in the 'established' trading logic on the currency market. For quite some time, negative eco news and risk avers investor behavior have supported the dollar (and the yen) and have weighed on the single currency. This theme was an important factor behind the decline of EUR/USD from highs above 1.60 to the correction low in the 1.2330 area. However, since end October the single currency 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 resilien We don't draw firm conclusions from yesterday's price action yet. However, over the previous days we already suggested that markets could look out for another trading theme. The jury is still out, but we grew more alert. Could the aggressive measures of monetary easing potentially become a (temporary?) negative factor for the dollar or will EUR/USD continue to trade in line with the swings in global risk aversion has been the case in the recent past? EUR/USD: extends rebound Support comes in at 1.2899/64 (Broken LTMA/Break-up hourly), at 1.2803/99 (St low/Neckline double bottom), at 1.2730/18 (Boll Midline/ Break-up), at 1.2687 (MTMA), at 1.2640 (MTMA/ST break-up), at 1.2565 (Week low) and at 1.2424 (Reaction low). . Resistance is seen at 1.3006 (Breakdown hourly), at 1.3081/95 (Week high/Boll top), at 1.3116 (05 Nov high) and at 1.3294 (Week high). The pair is slightly overbought. USD/JPY From a technical point of view, since the last week of September EUR/USD has tumbled from the 1.4866 reaction high to 1.2330 on October 28. Over the last three weeks the EUR/USD decline shifted into a lower gear and has established a sideways trading pattern. We are EUR/USD negative and are holding on to that tactics long term. However, over the past week; we indicated to take partial profit in case of return action towards the bottom of the range as we had the impression that the chances were rising for a more pronounced EUR/USD rebound. The price action on Monday and Tuesday perfectly fits our short-term approach. The power of this move could be an indication that the correction may have somewhat further to go. So, we are still not in a hurry to reinstall EUR/USD short positions at the current levels. We're not that far yet, but break above 1.3294 would be the indication that something has changed in the EUR/USD trading framework (Stop-loss). Yesterday, USD/JPY drifted lower throughout the trading session. The pair started trading in Asia in the 0.9700 area and ceded gradually ground during the day to close the session at 95.22, rather close to the intraday lows. The move was a bit surprising as the stock markets didn't perform that bad. The pair gained a few ticks on the Fed announcement of the new measures, but almost immediately resumed its decline. In line with our analysis for EUR/USD, we tend to raise the question whether this move, at least partly, should be considered as underlying dollar weakness. This morning, there were no important Japanese eco data. Japanese stocks show some moderate losses (1.33%). USD/JPY is holding close to yesterday's lows in the 95.00 area. 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 on November 04, but the rebound ran into resistance. Longer-term, we are preferring a scenario of the yen remaining well supported as there is still very little prospect for a sustained improvement in the global economic picture anytime soon. Recently, we favoured a sell-onupticks approach as long as the pair holds below this 100.55 mark. We are holding on to that view. Yesterday, we suggested that the (upward) correction in USD/JPY could go somewhat further in case of an easing in global market tensions. However, in this respect, yesterday's price action should be considered as very disappointing from a dollar point of view. The USD/JPY downtrend remains very well in place USD/JPY: disappointing USD performance Support stands at 94.82 (Reaction low), at 9440/23 (MT reaction low/Daily envelope), at 94.08 (Boll bottom), at 93.55 (Last Week low)), at 92.57 (Daily channel bottom) and at 90.87 (Year low). Resistance comes in at 95.55 (STMA), at 96.27 (MTMA/dailyu envelope), at 97.09/43 (Boll midline/ Reaction high), at 97.75 (MT Reaction high), at 9825 (Reaction high) and at 99.11 (Weekly envelope). The pair is neutral territory. EUR/GBP On Tuesday, EUR/GBP traded sideways in the 0.8500/0.8565 area during the firs hours of European trading. Early in the US, it even looked as if sterling was heading for a substantial daily loss. However, sterling regained ground later in the session. We didn't see much fundamental news behind this move. Cable outperformed EUR/USD after the announcement of the Fed measures. BoE's Bean indicated that the fall in sterling over the past year has been a central part of rebalancing Britain's economy. Nevertheless, EUR/GBP closed the session at 0.8443, compared to 0.8532 on Monday evening. Today, the details of the UK Q3 GDP will be published. 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, if not all, 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. 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. Yesterday's, EUR/GBP performance was a bit disappointing. Nevertheless, we hold on to our cautious buy-on-dips approach for EUR/GBP. A drop below 0.8334 would be a first warning signal to our ST EUR/GBP positive bias. The pair must return below the 0.8215/53 area (Break-up/uptrend line) to call off the red alert for sterling. EUR/GBP: sterling tries to fight back Support stands at 0.8414 (MTMA), at 0.8396/86 (Reaction low/daily envelope), at 0.8334/20 (Reaction low/Weekly envelope), at 0.8252 (Uptrend line), and at 0.8215 (Break-up). Resistance is seen at 0.8472 (Reaction high), at 0.8527 (daily envelope), at 0.8568 (Reaction high), at 0.8585 (Weekly envelope), at 0.8634 (Reaction high) and at 0.8662 (reaction high). The pair is in neutral territory. News US: Third quarter GDP contracts by 0.5% According to the preliminary report, third quarter GDP contracted by 0.5% while the BEA advance report showed a contraction of 0.3% in GDP. Looking at the details, personal consumption was downwardly revised (-3.7% from -3.1%), while private investment was upwardly revised (0.4% from -1.9%) due to residential investment showing a less severe decline (-17.6% from -19.1%). The lower level of Q3 GDP was also due to a wider net export deficit than estimated a month ago and slower pace of inventory liquidation. GDP is expected to drop further in the fourth quarter of 2008 and in the first half of 2009 as the headline decline was still mitigated by government consumption, net exports and inventories. The S&P Case Shiller house price index fell 17.4% Y/Y in September, more than the consensus estimate of -16.9% Y/Y. The three months annualized figure deteriorated sharply from -9.16% to -14.02%, but is still below the peak of -24.88% reached in March. These figures show a little acceleration in the month-on-month declines probably due to the increased turmoil in financial markets (decline credit availabilityconsumer confidence at rock bottom levels because of fears about unemployment). The OFHEO house price index dropped 1.3% M/M in September, while an outcome of -0.7% M/M was expected. The previous figure was downwardly revised from - 0.6% M/M to -0.8% M/M. Home prices showed a record drop and the seventh decline in a row which indicates that housing market conditions are deteriorating and a recovery is not yet around the corner. The Richmond Fed manufacturing index declined to -38 (from -26) in November while the consensus was seeking for only a more moderate drop (-27). The details showed a bleak picture as shipments (-31 from -24), new orders (-48 from -35), number of employees (-32 from -15) and average workweek (-30 from -14) all weakened sharply. Both prices paid (1.51 from 3.66) and prices received (-1.19 from 2.06) came down sharply. It is however important to note that manufacturers became more confident about their business prospects for the coming six months, albeit from historical all-time lows. . Consumer confidence (Conference Board) rose from an upwardly revised 38.8 in October to 44.9 in November, while the consensus was looking for an outcome of 38.0. The expectations sub-index improved (46.7 from 35.7), while the present situation showed a slight decline (42.2 from 43.5). Consumers were more pessimistic about labour market conditions, but the outlook for the labour market improved. While encouraging, the still very low level of confidence suggests that the impact of the rise on spending won't be substantial. 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.