Major Cross Rates (Temporary?) Enter Calmer Waters

Daily Forex Fundamentals | Written by KBC Bank | Nov 18 08 08:08 GMT |

Sunrise Market Commentary US Treasuries eke out some additional gains in quiet session Lower equities were again the factor behind Treasuries gains. Equities are now at crucial levels and either they will break higher or they have to rebound. If the latter happens some correction in the Treasury market looks likely. Bund testing the 2005 highs on the continuation charts On the European bond market, sentiment remains bullish with equities in the driving seat, as the calendar is as good as empty. Regarding the intra-EMU spreads, the Greek auction will be closely monitored. FX: major cross rates (temporary?) enter calmer waters Yesterday, global market uncertainty remained high but this time it had no decisive impact on USD/JPY or EUR/USD trading. EUR/GBP extended the correction after last week's impressive gains. Today, global investor sentiment will continue to set the tone for FX trading. However, the US TIC data might get some more attention than usually is the case. The Sunrise Headlines US Equities started the week lower (Dow/S&P -2.6%) led by a 6% drop in financials. S&P retests the five-year low. Asian stocks follow Wall Street lower. The US Senate Democrats proposed a $25 billion loan program for the auto industry, but disagreement persists on the best way to help the industry. The US Treasury Department announced it had transferred $33.56 billion to 21 banks as part of the capital infusion program, which brings the total amount injected into banks since the program started to $148.6 billion. Japan's economics Minister Kaoru Yosano says the recession could last longer than feared and the economy may not grow in the fiscal year starting next April. India's government will take steps to stimulate the economy to offset the impact of the global economic slowdown, according to the Finance Minister. He expects to end the fiscal year with decent growth. Crude oil ($ 55.42) ended the day slightly lower, neglecting the attack on the Saudi supertanker. Today, the calendar contains the UK CPI, US PPI and NAHB housing market reports Currencies: Major Cross Rates (Temporary?) Enter Calmer Waters EUR/USD On Monday, the global context for EUR/USD trading was little changed. Global investor sentiment rather than country/region specific data continued to set the tone for trading in the major cross rates. Equities are still the most evident catalyst to asses this global investor sentiment. In Europe stocks opened reasonably well with some small gains despite the poor close in the US on Friday evening. This caused EUR/USD to go higher too and the pair tested offers in the 1.27 area during the European morning session. The US data (Empire manufacturing survey and production data) were mixed and had again no impact on trading. Equities failed to establish a clear directional move but another temporary improvement in global investor sentiment after the close of the European markets triggered some additional gains of the euro against the dollar. However, once again, market sentiment was very instable. Equities took a sharp hit at the end of the US trading session and this was enough a reason for EUR/USD to cede some of the early gains, too. EUR/USD closed the session at 1.2650 compared to 1.2605 on Friday. Given the ongoing high degree of financial and economic uncertainty, we consider this a decent performance of the single currency. Today, the European calendar is again very light. In the US, the producer prices and the TIC data on US capital flows are on the agenda. Price data are not really a point of concern for currency trading. We are no big fan of the TIC data, but in the current environment of global market stress it will be interesting to see whether or not the US is able to take advantage of its presumed safe haven status. The appearance of Fed's Bernanke and US Treasury secretary Paulson before the financial rescue house panel is a wild card. 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 our 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 pattern. The correlation between EUR/USD and the stock markets is not one-for-one, but (the degree of) risk aversion remains an important 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 1.2330/1.3297 consolidation pattern. Whether the bottom of this range will hold is highly dependent on whether or not the major stock market indices will be able to avoid another down leg below the recent lows (840/818 area for the S&P). The jury is still out on this item. EUR/USD: consolidation continues Support comes in at 1.2532/12 (Daily envelope/Week low), at 1.2448 (Reaction low), at 1.2407 (Boll Bottom) and at 1.2388 (Last week low) and at 1.2330 (Reaction low). Resistance is seen at 1.2698 (Breakdown), at 1.2710 (MTMA), at 1.2740 (St high + Boll Midline) at 1.2806/23 (Daily + Weekly envelope), at 1.2863 (Reaction high), at 1.2927 (Reaction high), The pair is neutral 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 1.2330 on October 28. High profile intermediate supports have all been taken out with remarkable ease. Over the last three 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-sell in a case of return action higher. On Monday, the trading in USD/JPY continued to develop within the same framework that is already in place for quite some time. The high degree of uncertainty and the ongoing elevated level of market stress (the VIX index has continued its uptrend over the previous days) are supportive factors for the yen. However, yesterday's intraday swings in the stock markets were apparently not enough a reason to spark any directional trend in USD/JPY. The pair hovered up and down in a 96.00/97.50 trading range and closed the session at 96.43, compared to 97.14 on Friday. This morning, the Japanese department store sales showed a further steep decline. The report confirms the quick deterioration in the Japanese eco picture. Yesterday's GDP data showed that the Japanese economy has entered recession in Q3 and there is no reason to expect an improvement anytime soon. The Nikkei and most other Asian stock markets are again in negative territory. However, for now those stock market losses hardly have any impact on USD/JPY trading 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 three weeks ago. An easing in global market tensions sparked a temporary 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 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 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 96.19/95.91 (Reaction lows), at 95.18 (Daily envelope), at 94.48 (Last week low), at 94.05 (Daily Boll Bottom) at 93.15 (76 % retracement) and at 90.87 (Year low). Resistance comes in at 97.67 (MTMA), at 98.25 (Reaction high), at 98.68 (Breakdown), at 99.10/14 (LTMA/Weekly envelope), at 99.47 (Reaction high) and at 100.55 (Reaction high). The pair is in neutral territory. EUR/GBP On Monday, EUR/GBP extended the correction on steep gains recorded after last week's break above the previous range top in the 0.8200 area. The news flow on the UK economy remained negative (Rightmove house prices and CBI forecast) but contrary to what was the case last week, this news didn't cause any additional damage for the sterling. Quite the opposite, sterling regained some ground against the dollar and euro. For now, we consider this move as nothing more than a technically inspired unwinding of heavily overbought conditions (in EUR/GBP) after the recent sterling sell-off. EUR/GBP fell from intraday highs in the 0.8570 area early in the session to an intraday low in the 0.8410 in US trading. The pair closed the session at 0.8437, a decent loss compared to the 0.8541 close on Friday. Today, the UK inflation data are on the agenda. Inflation is expected the come down from the 5.2% cycle high to 4.8 %. This is still well above the BoE target, but last week markets already received the BoE's assessment on the inflation/deflation problematic, with the bank clearly putting the risk for inflation to fall below the BoE target within the Bank's policy horizon. So, today's inflation figure will have no big relevance for the BoE interest rate policy in the (near) future. The aggressive BoE rate cut two weeks ago and the negative assessment from the BoE on the UK economy 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 shouldn't come as a big surprise. 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. The pair currently tests the first important support area (0.8412 previous high). We watch out how far this correction has to go. We prepare to buy/add to EUR/GBP long exposure in case of signs that the correction has run its course EUR/GBP extends correction Support stands at 0.8388/75 (St low + Daily and weekly/Weekly Boll Top), at 0.8362 (23% retracement), at 0.8342/38 (Break-up hourly) and at 0.8240 (MTMA) and at 0.8225/15 (Uptrend line/Break-up). Resistance is seen at 0.8477/80 (Reaction high/Broken STMA), at 0.8568 (ST high/weekly Starc top), at 0.8584 (Boll top + Weekly envelope), at 0.8662 (New high). The pair is unwinding overbought conditions. News US: Industrial production rebounds after hurricanes In October, industrial production rose 1.3% M/M, while the consensus was looking for a more modest increase (0.2% M/M). The previous figure was downwardly revised from -2.8% M/M to -3.7% M/M. Most of the rebound was due to an improvement in manufacturing (0.6% M/M from -3.7% M/M), but also mining (6.1% M/M from -8.5% M/M) recovered. Utilities rose 0.4% M/M in October (from 2.4% M/M). Looking at the manufacturing sector, durables dropped 1.8% M/M (from -3.1% M/M), while non-durables showed a significant rebound (3.1% M/M from-4.5% M/M) due to climbing petroleum and coal products (9.9% M/M from -8.5% M/M) and chemicals (5.1% M/M from -8.3% M/M). The Fed added that the decline was due to refineries and oil rigs restarting their operations after the hurricanes Ike and Gustav. Excluding the effects of the hurricanes and strike at Boeing, output would have contracted by about 0.7% M/M in October and September. The New York Empire State manufacturing survey showed a further weakening of conditions in November. The headline index fell from -24.62 to -25.43, the lowest level since series began in 2001. Looking at the details, the number of employees (- 28.92 from -3.66) and average workweek (-25.3 from -9.76) deteriorated sharply. But also new orders (-22.21 from -20.45); shipments (-13.89 from -8.85), inventories (- 26.51 from -17.07) and unfilled orders (-24.1 from -12.2) worsened significantly. Both prices paid (20.48 from 31.71) and prices received (6.02 from 20.73) declined sharply. Although the headline index showed only a modest further deterioration, the details painted a bleaker picture. 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.