FX: Major Cross Rates Continue To Show Intraday Volatility, But No Clear Directional Trend

Daily Forex Fundamentals | Written by KBC Bank | Nov 17 08 08:45 GMT |

Sunrise Market Commentary US Treasuries move higher on renewed equity weakness and distressed eco data Plunging retail sales, dismal corporate news and renewed equity weakness helped Treasuries to lofty gains on Friday. This week, eco data will remain very weak, but it will be equities, the state of funding markets and maybe Fed appearances that drive the markets. Technical pictures remain bullish at shorter end of the curve, but low volumes traded make us a bit unease. European yield curve steepens further On the European bond market, the steepening continued unabatedly, as 2- and 5-year yields set new cycle lows. The Bund however has still strong resistance ahead at 118.88 before the technical picture becomes outspoken bullish. FX: major cross rates continue to show intraday volatility, but no clear directional trend Major FX cross rates are still driven by the swings in investor's risk appetite on global markets. EUR/USD and USD/JPY lost some ground on the poor stock market close in the US on Friday. EUR/GBP enters calmer waters after the recent sterling sell-off. The Sunrise Headlines US Equities ended the week lower (Dow/S&P -3.82% / -4.17%), as eco data and corporate news was disconcerting. Asian stocks start the week mixed after weak economic data in Japan. The Washington G-20 meeting concluded with a statement that lays down the areas in finance where changes are needed and a timetable for these decisions to be made. They also asked for a broader policy response regarding fiscal stimulus and more rate cuts, but no coordinated action was planned. The Japanese economy sank into a technical recession in the third quarter as growth declined for the second quarter in a row. GDP fell by an annualized 0.4%, while economists predicted the economy would grow 0.1%. Iceland announced it had reached a deal with Britain and other European Union states on how to repay foreign savers. The IMF will vote on a loan package to Iceland on Wednesday. The US Congress starts its debate on an emergency stimulus package in a special post election session. The plan should include help to the carmakers worth up to $25 billion in loans to help Detroit survive the financial crisis. President-elect Obama said the most important thing is that we avoid a deepening recession and we shouldn't worry about the deficit next year or even the year after. Crude oil ($55.93) declined as the OPEC may wait until its meeting on December 17 to make a decision on whether to cut production targets again. The calendar contains the NY Fed and US industrial production. Currencies: FX: Major Cross Rates Continue To Show Intraday Volatility, But No Clear Directional Trend EUR/USD On Friday, EUR/USD trading was again driven by global investor sentiment. The swings between hope and fear continued to set the tone for trading. The Eco calendar in Europe and in the US contained some interesting releases as there were the European Q3 GDP data and CPI and the US retail sales and Michigan consumer confidence. However, those data had only a limited and temporary impact on trading, at best. EUR/USD started Friday's session on a strong footing supported by the gains of US stocks on Thursday and the positive start in Europe. Nevertheless, underlying doubts on the sustainability of this rebound persisted and EUR/USD drifted lower going into the early morning data. The retail sales were again very weak but in line with the market reaction recently, poor eco data from the US were an ambiguous signal for the single currency. US stock markets at first didn't react too negative to these data and this even helped EUR/USD to regain part of the previous intraday losses. However, a late session decline on the US stock markets also hammered EUR/USD and the pair closed the session at 1.2605, compared to 1.2769 on Thursday. Over the weekend, all eyes were on the G20 meeting in Washington. As one could expect in advance, this meeting delivered a long to do list with a lot of good intentions. From a market point of view, it contains too few specific measures to change the course of events on global markets. EUR/USD trades around the closing levels of last Friday at the moment of writing. Today, the European calendar only contains some second tier releases. In the US, the NY Empire state manufacturing survey and the production data are scheduled for release. Especially, the timely surveys are interesting, but we doubt they will have a lasting impact on global trading and on EUR/USD in particular. So, sentiment on global stock markets will continue to be the most important single driver for EUR/USD also today. Already for quite some time, negative eco news and risk avers investor behavior has supported the dollar (and the yen) and has weighed on the single currency. This theme was an important factor behind the decline of EUR/USD from highs above 1.60 to current correction low in the 1.2330 area. We hold on to this EUR/USD negative bias longer term. However, since end October, the single currency has showed more resilient and has since developed a short-term consolidation pressure. The correlation between EUR/USD and the stock markets is not one-for-one, but (the degree of) risk aversion is still the dominant factor for EUR/USD trading. For now, we continue hold on to our view that the pair might continue trading within the barriers of this consolidation pattern within the boundaries of 1.2330 and 1.3297. Whether the bottom holds is highly dependent on whether or not the major stock market indices to avoid another down leg below the current range bottom (840/818 area for the S&P). Considering the large swings at the end of last week, the jury is still out on this item. EUR/USD: consolidation continues Support comes in at 1.2513 (ST low), at 1.2448 (Reaction low), at 1.2388 (reaction low) and at 1.2331/24 (Reaction low). Resistance is seen at 1.2614 (Breakdown), at 1.2796 (Reaction high), at 1.2855 (Reaction high), at 1.2927 (Reaction high), at 1.2976 (MT breakdown), at 1.3116 (Reaction high) and at 1.3294 (Range top). The pair is moving into oversold territory. USD/JPY 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. High profile intermediate supports have all been taken out with remarkable ease, but over the last two weeks the EUR/USD decline shifted into a lower gear but the pair failed to regain the first important resistance area 1.3259/94 in a sustainable way and gradually returned south. Recently, we favoured a sell-on-upticks approach in case of return action higher in the above mentioned trading range. We hold on to that tactics but we do not yet front run on a break of the downside of the range. In this respect, we still tended to reduce/take profit on EUR/USD short exposure in case of dips towards to range bottom and look to re-buy in a case of return action higher. On Friday, USD/JPY trading again showed some intraday swings, but at the end of the day the changes were rather limited. The pair was traded in the 97.00 area at the start of trading in Europe, it lost some ground going into the start of the US trading session (the correlation with European equities at that time was not really on-to-one) but regained most of the intraday 'losses' later in the session, despite highly volatile trading conditions on the US stock markets at the end of the session. The pair closed the session at 97.14, compared to 97.68 on Thursday. This morning, the (preliminary) Japanese Q3 GDP data came out in negative territory for the second consecutive quarter, sparking a lot of headlines on Japanese recession on the newswires. Negative eco data in theory are no good news for the yen, but this is not the way the markets usually react these days. Bad economic news, a poor start of the Asian stock markets and maybe also some disappointment on the outcome of the G20 supported the yen at the start of trading this morning. The pair was traded in the 96 area early in Asia but regained some ground as Japanese (and some other Asian stock markets) managed to overcome the early weakness. 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 three weeks ago. An easing in global market tensions sparked a temporary USD/JPY rebound with the pair reaching a reaction high in the 100.55 on November 04, but the rebound ran into resistance. Longer-term, we prefer 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 indicated that gains beyond the 100.55 reaction high wouldn't be that easy short-term. A sell-on-upticks approach remains favoured as long as the pair holds below the 100.55 mark. USD/JPY: gradual downtrend continues Support stands at 95.88 (Reaction low), at 95.11 (Reaction low), at 94.48 (Last week low), at 94.07 (LT reaction low) at 93.15 (76 % retracement) and at 90.87 (Year low). Resistance comes in at 98.25/30 (Reaction highs), at 98.68 (Breakdown), at 99.47 (Reaction high) and at 100.55 (Reaction high). The pair is in neutral territory. EUR/GBP On Friday, EUR/GBP again showed some wide intraday swings. A lot of market players apparently still had to adapt positions after the recent sell-off of the sterling. There were no important UK data on the calendar and trading was again very much order driven. As was the case in the previous sessions, the sterling came under pressure in the run-up the US trading session. EUR/GBP at that time set an intraday high in the 0.8635 area but Thursday's highs were not really challenged. Ahead of the weekend, this apparently inspired some short-term players to reduce sterling short-exposure; EUR/GBP closed the session at 0.8541 compared to 0.8606 on Thursday. This morning, the Rightmove house prices index showed again a steep decline (- 2.9% M/M, -7.1 % Y/Y). On top of that, the CBI came out with a very negative assessment of the UK economy going forward. However, at least for now this release caused the big swings in sterling trading. EUR/GBP trades in the 0.8545 area at the moment of writing. The aggressive BoE rate cut two weeks ago and the negative assessment from the BoE after the publication of the inflation report pulled the trigger for an aggressive sterling selling wave last week. The quick loss of interest rate support and the very negative outlook for the UK economy going forward made sterling lose all its attractiveness. Wednesday's brake 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 last week, some consolidation/correction is well possible. However, a buy-on-dips approach remains favoured. Longer-term we continue to put the risk for additional sterling losses, even from the current levels. The pair needs to return below the 0.8215 area (uptrend line) to call off the red alert for the sterling. EUR/GBP: to enter calmer waters short-term? Support stands at 0.8492 (Break-up hourly), at 0.8433 (STMA) at 0.8379 (Break-up hourly) and at 0.8215/04 (Uptrend line/MTMA). Resistance is seen at 0.8564 (Boll top), at 0.8634 (Reaction high hourly), at 0.8662 (New high). The pair is in overbought territory. News US: Retail sales plunge sharply Retail sales surprised on the downside in October, falling 2.8% M/M while a decline of 2.1% M/M was expected. The previous figure was downwardly revised from 1.2% M/M to 1.3% M/M. Looking at the details, sales of gasoline stations declined very sharply (-12.7% M/M from -0.4% M/M) and also motor vehicles and parts worsened significantly (-5.5% M/M from -4.8% M/M). Excluding cars, retails sales dropped 2.2% M/M, while the consensus was looking for a more modest drop (-1.2% M/M). In October, both retail sales and retail sales less autos showed the steepest declines in survey history which indicates that consumers are very pessimistic and are delaying purchases of expensive goods. But it is important to note that part of the decline is due to a sharp plunge in oil prices. Import prices dropped by 4.7% M/M in October, after falling a downwardly revised 3.3% M/M In September. On a yearly basis import inflation fell back from 21.4 Y/Y in July to 6.7% Y/Y in October. The details show that most of the drop is due to falling oil prices (-16.7% M/M), but also industrial supplies declined sharply (-11.0% M/M). It might be important to note that prices of goods from China decreased 0.3% M/M (from 0.0% M/M in September and 0.2% M/M in August), which suggests inflationary effects from China are weakening. University of Michigan consumer confidence came out slightly better then expected in November. The headline index showed a marginal improvement from 57.6 to 57.9, while the consensus was seeking for an outcome of 56.7. The economic conditions sub-index rose from 58.4 to 61.4. The economic outlook deteriorated from 57.0 to 55.7, which illustrates that consumers are becoming more pessimistic about the future. EMU: Economy slides into technical recession In the euro zone, third quarter GDP contracted by 0.2% Q/Q, which was in line with the consensus estimate. This is the second consecutive quarter of negative growth which indicates that the euro zone economy slid into a technical recession. On a yearly basis, GDP grew 0.7% Y/Y after 1.4% Q/Q in the second quarter of 2008. This is the first technical recession since the start of the euro zone which signals the need for further (aggressive) rate cuts. The October euro zone CPI figure confirmed the flash estimate; coming out at 3.2% Y/Y, which is in line with the estimate. The month-on-month figure (0.0% M/M) came out lower than the flash estimate. Core CPI stabilized at 1.9% Y/Y. 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.