Euro Enters Calmer Waters

Daily Forex Fundamentals | Written by KBC Bank | Jan 19 09 08:24 GMT |

Sunrise Market Commentary US Treasury market closed in observance of M-L King Day On Friday, the belly of the curve lost moderate ground, as equities cannot really convince, disappointing investors. Bund corrects only very moderately On Friday, following a lower opening, the Bund traded sideways in a wide range. However, at the end of the session, European bonds were still very close to the record highs. Today, trading will be sideways as the US market is closed and the EMU calendar is very thin. FX: euro enters calmer waters After the ECB interest rate decision, EUR/USD managed to recoup some of the recent losses on Friday. A less negative global investor sentiment gave the single currency some downside protection, too. The Sunrise Headlines US Equities ignored bad news from financials and ended Friday's session with modest gains. Financials were again under pressure dropping 2.39%. Asian stocks start the week mixed. The UK Treasury announced a new plan to guarantee and purchase banking assets and will also offer capital and asset-protection for banks in conjunction with other nations. Royal Bank of Scotland announced it expects to post a full-year loss before exceptional goodwill impairments of as much as £8 billion. The bank plans to raise £5 billion from investors to replace the UK Treasury's preference shares. President-elect Obama will demand that banks who received public support step up lending as they promised to restore the flow of credit, according to top advisers of Obama. Crude oil ($36.22) rose slightly on Friday after speculation that OPEC may cut output further to boost prices. Today, the calendar is thin as US Markets are closed in observance of Martin Luther King Day. Currencies: Euro Enters Calmer Waters EUR/USD On Friday, the euro experienced a more constructive trading session. The short-term uncertainty on the prospects of the ECB monetary policy was out of the way after Thursday's rate decision and press conference. Global market sentiment turned less negative compared to the previous sessions and this also helped the single currency to regain some of the losses from earlier last week. While still an item, markets also were less focused on the credit quality of European governments. The US eco date were far from convincing from a dollar point of view but had no lasting impact on trading. So, the euro entered calmer waters and closed the even managed to record a decent gain in a daily perspective. EUR/USD closed the session at 1.3267 compared to 1.3115 on Tuesday. EUR/USD: entering calmer waters? Support comes in at 1.3302 (Gap hourly), at 1.3241/31 (ST breakup/ Broken STMA), at 1.3208 (Reaction low hourly), at 1.3163 (Daily envelope) and at 1.3025 (Reaction low). Resistance is seen at 1.3372/85 (Daily Channel top/daily envelope + ST high), at 1.3424/51 (23% retracement/ MT break-uàp hourly). 1.3485 (MTMA), at 1.35 (Broken LTMA) The pair is neutral territory. USD/JPY Today, the eco data calendar in Europe is almost empty, but the European commission publishes its economic growth forecasts. US markets are closed for Martin Luther King Day. In this context one might expect EUR/USD traders to take a wait-andsee approach. In the (Financial) press there will be a flood of articles on the policy intentions from the new US President Obama. At the start of the new year, EUR/USD showed an indecisive trading pattern However, the market gradually inclined to give more weight to the negative news coming from the euro zone. The deterioration of the European government finances became an ever more important factor for EUR/USD trading. The eco news headlines from the US were far from convincing either, but at least for now they were given less weight and were seen less negative for the dollar. The dollar had the advantage of the doubt over the euro. The flip-side of this market assessment is that the euro might gain some support in case overall (stock) sentiment to turns less negative and this was the case on Friday. However, it's much too early to draw firm conclusions from one day of relative calm. More negative news headlines on the credit quality of the European member states remain a potential negative factor for the euro. Longerterm we continue to have doubts on the chances for a protracted dollar rebound as the budgetary and monetary environment (quantitative easing) in the US is not really USD supportive either. In this respect we keep a close eye on the market reaction in case US authorities were to unveil new measures to support the US banking system (Bad bank?). After all, the currency market still lacks a clear trading theme and in this context, we keep a close look at the technical charts. From a technical point of view, EUR/USD in December broke above the previous sideways trading pattern and an important downtrend line (cf. graph). This made the MT picture for EUR/USD positive. However, the rebound lost momentum in the second half of December and in a forceful correction, EUR/USD dropped below the top of the previous sideways range (1.3300 area). This removed the MT Euro positive bias and makes the picture neutral to negative short-term. Last Friday we indicated turning slightly less negative on the euro in a day-to-day perspective and that we were looking out whether some consolidation/technical rebound might be at hand. We hold on to this assessment. A sustained rebound above the ST downtrend line/channel bottom (1.3372, cf graph) could support the day-to-day momentum in this pair On Friday, USD/JPY extended the rebound that started on Thursday. A less negative investor sentiment caused some additional scaling back of yen long positions. Over the previous days USD/JPY became already better protected (even in days of a yen favouable context) and on Friday this closed some additional yen profit taking as global risk aversion declined. USD/JPY closed the session at 90.72, compared to 89.84 on Thursday. This morning, Japanese eco data (Industrial production/department store sales) only confirmed the sharp setback in economic activity, but this had again very limited impact on USD/JPY trading. Most Asian/Japanese stock markets trade slightly higher but the gains are far from impressive. Looking at the charts, global market stress and overall dollar weakness in the wake of the US Fed's announcement on quantitative monetary easing hammered USD/JPY and the pair set a reaction low in the 87.15 area on December 17. Since then, the pair entered calmer waters. The pair tested a first resistance area around 94 but the test was rejected. The long-term trend in the pair remains negative. In a day-to day perspective, we recently warned that the downtrend might slow below 0.9000 (among others as Japanese officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8715 reaction low). Last week, we advocated partial profit taking in case of return action towards the 2008 lows. In a day-to-day perspective we hold on to our view that there is some more room for a ST correction/ rebound in USD/JPY. USD/JPY: yen runs into resistance Support stands at 90.05 (Daily envelope), at 89.89/80 (STMA/Weekly envelope), at 89.46 (Break-up), at 88.48/44 (Last week low + Boll bottom)/ LT reaction low hourly) and at 87.13 (Reaction low 2008). Resistance comes in at 91.34/44 (Daily envelope/Target hourly double bottom) and at 91.66 (Reaction high), at 92.31 (Breakdown daily) and at 92.98 (Weekly envelope). The pair is in neutral territory EUR/GBP On Friday, sterling started the day on a strong footing and EUR/GBP dropped the 0.8845 area, coming close to previous reaction lows. However, this first important support level held and EUR/GBP throughout the session recouped the earlier losses; supported by a better euro sentiment overall. The pair even closed the session at 0.9003, compared to 0.89601 on Thursday. There were no important UK eco data published on Friday. Already on Friday, there was a lot of debate on the expected UK measures to support the banking sector. Today, the new plan to support the financial sector will continue to dominate the UK financial headlines. Through a series measures, the UK government will try to induce the resumption of lending to all crucial sectors of the UK economy. We don't have a strong view on the potential impact of the banking plans for sterling ST run. Big UK budgetary commitments together with the prospects for additional UK rate cuts are no by definition a support for sterling. Regarding the eco data, the Rightmove house prices (published overnight) declined 1.9% M/M and 7.3% Y/Y. At the start of 2009, pressure on sterling eased and this trading pattern was even extended after the BoE interest rate decision. On top of that, Euro skepticism also weighed on EUR/GBP. Nevertheless, the sterling rebound against the euro ran into resistance early last week. On the technical charts, the break above a series of high profile resistance levels in November/December has made the long term technical picture outright positive for EUR/GBP. Since the start of 2009, EUR/GBP showed quite a forceful correction but in our view this move still didn't change the long-term sterling negative picture yet and we consider the recent EUR/GBP decline as corrective in nature. Since Monday last week there are some tentative signs that the sterling rebound might be losing momentum and mid last week we reinstalled a cautious buy-on-dips approach. We hold on to that bias even if we have to admit that the EUR/GBP performance at the end of last week was not really convincing. A drop below the 0.8841 ST reaction low would be a first warning. A sustained return below the previous high (0.8663) would question our long-standing sterling negative attitude. EUR/GBP: consolidation Support stands at 0.8950/36 (Break-up/Daily envelope), 0.8900 Daily uptrend line), at 0.8844 (Last Week low), at 0.8939/31 (Reaction low/62 % retracement). Resistance is seen at 90.04/21 (ST high/STMA), at 0.9044/58 (Reaction highs), at 0.9093 (Daily envelope), at 0.9106/34 (MTMA/reaction high). The pair is in neutral territory. News US: Weak industrail production due to plant shutdowns In December, industrial production surprised on the downside, falling twice as much as expected. Industrial production plunged 2.0% M/M and the November outcome was downwardly revised from -0.6% M/M to 1.3% M/M. The manufacturing sector was hardest hit (-2.3% M/M), due to a 7.2% M/M drop in motor vehicle, parts, but also mining (-1.6% M/M) and utilities (-0.1% M/M) declined. Looking ahead, industrial production is forecasted to remain weak in January due to plant shutdowns in the auto sector. In December, CPI dropped by 0.7% M/M, while a decline of 0.9% M/M was expected. Consumer prices rose 0.1% Y/Y compared to December 2007, the slowest pace since August 1955. Core CPI, which excludes food and energy, rose 1.8% Y/Y (from 2.0% Y/Y). Again, most of the decline was due to energy related products, but also other commodities dropped. In the coming months, inflation is expected to decline further which will stoke fears of deflation. In January, University of Michigan consumer confidence showed an unexpected improvement. The headline index rose from 60.1 to 59. against the expectation of 59.0. Economic conditions deteriorated marginally (69.2 from 69.5), while the economic outlook improved (57.2 from 54.0). Although the index showed a slight improvement, it is too early to conclude that consumers are becoming more optimistic. EMU: Trade deficit widens as exports weaken The euro zone trade deficit widened from a downwardly revised -2.1B to -4.9B in November, in line with the consensus estimate (-4.8B). The widening deficit was due to 4.7% M/M decline in exports, while imports fell 2.5% M/M. Exports declined at the fastest pace in more than eight years. The deficit may continue to widen in the coming months as demand is expected to remain weak in the coming months. 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.