USD/JPY Tests Key Support Level, Sterling Records Heavy Losses

Daily Forex Fundamentals | Written by KBC Bank | Dec 02 08 08:30 GMT |

Sunrise Market Commentary Bernanke's quantitative policy remarks flatten curve Weak equities and awful eco data are a fertile environment for Treasuries, but it was Bernanke who stole the show by suggesting beside a further rate cut, more quantitative measures like purchases of Treasuries. Yields plunged, but the 2- year lagged the remainder of the curve. Risk aversion favours German government bonds Yesterday, German yields extended their recent decline, as 5-, 10- and 30-year yields all fell to new cycle lows. As such, all German yields are now approaching the all-time lows. On the European bond market, German government bonds again outperformed their counterparts. The intra-EMU government bond spreads with Greece, Italy and Belgium set new highs. FX: USD/JPY tests key support level, sterling records heavy losses Resurfacing market stress caused the 'usual' reaction in the major FX cross rates. The yen took the lead and the dollar gained slightly ground against the single currency. A series of poor eco data and uncertainty in the run-up to the BoE interest rate decision triggered a new, aggressive selling wave in sterling. The Sunrise Headlines US Equities started the week sharply lower (Dow/S&P -7.7% / -8.93%) led by financials (-17%) and energy shares (-10%). Asian stocks followed Wall Street lower despite the aggressive Australian rate cut. Yesterday evening, Federal Reserve Chairman Bernanke said: 'Although further reductions from the current federal funds rate target of 1% are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited'. The Reserve Bank of Australia cut its benchmark interest rate by 100 basis points, the fourth reduction in three months as the economy is cooling rapidly. The US economy has entered recession in December 2007, making this contraction already the longest since 1982, the National Bureau of Economic Research said on Monday. The Bank of Japan announced it would accept a wider range of corporate debt as eligible collateral to ease Japanese companies' shrinking access to funding at the end of the year. Thailand's Constitutional Court dissolved the ruling People Power Party and two coalition partners forcing Prime Minister Somchai Wongsawat to step down. Crude oil fell below $48 a barrel, the lowest level in more than 3 years, after Opec delayed its decision to cut production again Currencies: USD/JPY Tests Key Support Level, Sterling Records Heavy Losses EUR/USD On Monday, the global crisis feeling flooded global financial markets again. This had also some impact on the currency markets, but the effect on most major cross rates was far less pronounced compared to the wild swings seen in the bond or equity markets. Yesterday's price action in EUR/USD was a good example. The pair started trading in Europe in the 1.27 area and in nervous trading drifted lower to reach intraday lows in the 1.2585 area early in US trading. The eco data (poor European PMI's) might have played a minor role, but global risk averse investor behaviour was the dominant factor for trading. The continuous decline of the oil price was also no help for the single currency. The steeper than expected decline in the US manufacturing ISM had no lasting impact on EUR/USD trading. Later in the session, EUR/USD basically traded sideways despite the deepening losses on the US stock markets. Bernanke in a speech indicated that the Fed had alternative, unconventional tools it could use as its official policy rate was coming closer to zero. We didn't see a direct link between the EUR/USD price action and the content of his speech, but we think that unconventional measures (buying Treasuries to bring long term rates lower) are no help for the dollar either. EUR/USD closed the session at 1.2611 compared to 1.2691 on Friday. Given the high degree of global market stress and the steep decline in the oil price, we consider this loss of EUR/USD as not really excessive. EUR/USD : limited losses despite global market turmoil Support comes in at 1.2582/65 (ST low/MT reaction low), 1.2487 (Daily envelope), at 1.2422 (21 Nov low), at 1.2388/75 (13 Nov low/Boll bottom), at 1.2331 (reaction low). Resistance is seen at 1.2688 (reaction high), at 1.2705 (MTMA + Boll Midline + weekly envelope), at 1.2748 (STMA), at 1.2802 (LTMA), at 1.2844 (Breakdown hourly). The pair is in neutral territory USD/JPY Today, the calendar in the US only contains the vehicle sales which usually are no market mover. The same applies to the European PPI data. So, the usual global drivers (stocks and oil) will continue to set the tone for EUR/USD trading. The debate on the 'optimal' size of the ECB rate cut on Thursday will also continue. This lingering uncertainty might continue to be a slightly negative factor for the single currency in the run-up to the ECB decision. Negative eco news and risk averse investor behavior have supported the dollar (and the yen) at the expense of the euro for several weeks, even months. It was the main theme 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. The correlation between EUR/USD and indicators of risk aversion has continued to play a role, but the euro has gradually shown more resilience. Early last week, the euro tried to leave the lower end of the trading range behind, but the gains could not be sustained. Last week, we suggested that markets may start looking out for another trading theme, which by hypothesis would be less USD supportive. This idea was not really confirmed by the price action at the end of last week. The uncertainty on the outcome of the ECB meeting is too high. Nevertheless, alertness for a change in the trading theme remains warranted. From a technical point of view, during the last four weeks, EUR/USD has established a sideways trading pattern. The charts suggest the EUR/USD trend is negative longer term. However, recently 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 EUR/USD drifted again lower at the end of last week, the jury is still out. Going into the ECB interest rate decision, short-term players may still look to sell EUR/USD on a return action higher in the established trading range. A sustained break above the 1.3294 area would be an important technical signal of a change in the USD constructive market sentiment. (Stop/loss on EUR/USD shorts) However, we're not that far yet. On the downside, we expect the 1.2330 support area to hold, at least short-term. On Monday, USD/JPY was traded as could have been expected in an environment of global market stress. The ongoing slide on the European stock markets caused a first selling wave during the morning session in Europe. (USD/JPY dropped from the 95.25 to the 93.60 area). A brief consolidation period kicked in at the start of trading in the US, but later in the session, a second selling wave occurred and caused the pair to close the session at 93.19, compared to 95.52 on Friday. USD/JPY closed the session below the key 93.55 support (neckline), which is important from a technical point of view. Overnight, Japanese/Asian stocks did build on yesterday's steep losses in the US and Europe (except for the Chinese market). However, at least for now this hasn't caused any additional losses for the USD/JPY cross rate. At an emergency meeting, the BoJ left its policy rate unchanged at 0.30% but announced it would accept a wider range of collateral to improve Japanese companies' access to funding at the end of the year. The Chinese central bank set is reference rate for the yuan against the dollar marginally lower again. The yuan is losing slightly further ground after yesterday's selloff. The RBA cut its official interest rate by a steeper than expected 1.00% (from 5.25% to 4.25%). The reaction of the Aussie dollar to the decision was rather muted; losing slightly ground against the US dollar. Looking at the USD/JPY charts, global market stress hammered the USD/JPY cross rate and the pair set a new reaction low at 90.93 at the end of October. 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, is intact. We are holding to a sell-on-upticks approach as long as the pair stays below 100.55. The USD/JPY downtrend remains very well in place. Yesterday's jump down below the 93.55 support opens the way for a retest of the year lows. Stocks markets will decide whether/when this pattern will be completed USD/JP: testing last support area ahead of the year low Support stands at 92.89/86 (Reaction low/weekly envelope), at 93.38 (Daily envelope), at 91.86 (Daily Channel bottom since 103.06), at 91.25 (Weekly Boll Bottom) and at 90.87 year low). Resistance comes in at 93.93 (Daily envelope), at 94.57/60 (Breakdown/ STMA), at 95.49/73 (Reaction high hourly/MTMA). The pair is moving into oversold territory. EUR/GBP On Monday, sterling continued its rollercoaster ride. At the end of last week, the UK currency ignored the negative UK eco data and EUR/GBP even dropped below a first important support level (0.8334 neckline). However, the tide turned at the start of the new trading week. Global investors became again more risk averse and this weighed on the UK currency from the start of trading in Europe yesterday morning. On top of that, the UK eco data were again awful. Mortgage approvals stayed at the cycle low, UK house price dropped 8.1% Y/Y (according to Hometrack) and last but not least, the UK PMI survey for the manufacturing sector dropped to its lowest level since the start of the series in 1992. So, EUR/GBP started trading in Europe in the 0.8275 area but rallied to reach an intermediate high in the 0.8440 area around noon. A second selling wave kicked in at the start of trading on the US stock markets. EUR/GBP set an intraday high in the 0.8525/30 area and closed the session at 0.8467. This was still a loss of more than two big figures for sterling compared to the close on Friday (0.8252). Today, the UK calendar only contains the PMI survey on the construction sector. 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 long term 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. On Friday, the pair temporary dropped below a first important support level (0.8334 area), but this test of the downside has been rejected by yesterday's sharp rebound. The key 0.8215 area has not been challenged. There is lot of uncertainty on the outcome of the ECB interest rate decision, but we have the impression that sterling is even more vulnerable going into Thursday's BoE interest rate decision. An additional loss of interest rate support contains the risk for more sterling losses against the euro. Especially if global market stress were to stay high, a retest of the highs in EUR/GBP over the next days shouldn't come as a big surprise. EUR/GBP: impressive rebound Support stands at 0.8445/34 (Broken MTMA/Break-up), at 0.8401 (Breakup daily), at 0.8390/84 (STMA/daily envelope), at 0.8364/48 (Boll Midline/ Break-up hourly). Resistance is seen at 0.8487 (ST high), at 0.8523/27 (Weekly envelope/ St high), at 0.8550/60 (Daily envelope/76% retracement), at 0.8568 (25 Nov low), at 0.8662 (Reaction high). The pair is in neutral territory News US: manufacturing ISM shows deepening recession Manufacturing ISM continued its decline in November as the headline index dropped from 38.9 to 36.2, while a figure of 37.0 was expected. The details show a significant drop in production (31.5 from 34.1), new orders (27.9 from 32.2), backlog of orders (27.0 from 29.5) and imports (37.5 from 41.0). Employment (34.2 from 34.6) declined only slightly, while new export orders stayed unchanged at 41.0. Prices paid (25.5 from 37.0) showed another sharp plunge in November and are now far away from their peak of 91.5 reached in June. Business sentiment in the manufacturing sector is now at its lowest level since 1982, which confirms again that the economy is sliding into a severe recession and a recovery is not around the corner. EMU: manufacturing PMI revised to new record low In the euro zone, the final manufacturing PMI figure showed a plunge from 41.1 to 35.6 in November, while the first estimate came out at 36.2. The details showed a slight downward revision in output, new orders and unemployment. Euro zone manufacturing PMI is now at historically low levels which indicates that the recession is more severe that previously thought. Other: UK manufacturing PMI confirms bleak outlook UK manufacturing PMI plunged from a downwardly revised 40.7 in October to 34.4 in November, while the consensus was seeking for a more modest decline. Looking at the details, output (31.9 from 41.0), new orders (29.7 from 37.0) and new export orders (37.1 from 42.8) showed sharp plunges, but also unemployment (35.7 from 40.2) worsened significantly. Prices were significantly lower as output prices dropped from 59.0 to 52.1 and input prices declined from 54.5 to 44.2. The UK manufacturing sector shrank at the fastest pace in at least 16 years as producers became more pessimistic about the economic outlook. In the UK, mortgage approvals dropped from 33 000 in September to 32 000, which is in line with the expectations. Net consumer credit rebounded from the February 2004 low of 0.3B to 0.8B in October and net lending secured on dwellings came out at 0.5B. The previous figure was downwardly revised from 2.2B to 1.5B. 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.