Sunrise Market Commentary

Daily Forex Fundamentals | Written by KBC Bank | Feb 20 09 08:18 GMT |

US Treasuries extend correction lower on supply concerns Equity weakness and dismal eco data weren't enough to stop the correction. Supply concerns remained at the forefront. However, after two days of correction, Treasuries should find their composure, unless equities would stage a powerful rally. Intra-EMU yield spreads narrow, as Germany and France signal help in case of financial trouble German bonds declined for the second consecutive day on supply concerns and profit taking following its recent outperformance compared to the other peripheral EMU government bonds, as France and Germany signaled help in case another member state would face financial trouble. The decline in German bonds shouldn't go much further today given the weak performance of the equity markets and the ECB debate on quantitative easing. FX EUR/USD rebound (again) short-lived On Thursday, EUR/USD performed a temporary rebound on easing global market stress and market hopes on intra EU/EMU support. However, at least for now the commitment from the likes of German Chancellor Merkel fail to impress the (currency) market. The yen remains in the defensive. The Sunrise Headlines US Equities remained under pressure on Thursday as financials lost more than 5%. S&P ended 1.2% lower, close to key support levels. Most Asian stocks end the week lower, while Chinese shares show a moderate rebound. Chancellor Angela Merkel said Germany stood ready to help eastern European countries in financial difficulty, primarily via the IMF, but declined to speculate about coming aid. French Finance Minister Lagarde said euro zone countries should try to find solutions for member states that need financial rescues, without seeking help from the IMF. Reserve Bank of Australia Governor Glenn Stevens said the bank has the ammunition to cut interest rates further in the coming months if economic conditions worsen although they are unlikely to fall as much as in the United States and UK. The Obama administration's $275 billion housing plan to stem a wave of US home foreclosures will start having an impact as soon as March, Federal Deposit Insurance Corporation chairman Sheila Bair said on Thursday. Crude oil ($38.55) rose sharply on Thursday after a US report showed a 813 000 barrels drop in inventories. Today, the calendar contains the euro zone PMI figures, UK retail sales and US CPI. Currencies: FX EUR/USD Rebound (Again) Short-Lived EUR/USD On Thursday, EUR/USD rebounded, trying to reverse at least part of its losses earlier this week. An (albeit limited) easing of global market tensions triggered some profit taking on recent EUR/USD shorts. Pleadings from the World Bank to take coordinated action to support the economies and East and Central Europe might have been a supportive factor, too. EUR/USD in two waves rebounded from levels below 1.26 to test offers in the 1.2750 area early in US trading. Markets at that time also looked out for a joined press conference of German Chancellor Merkel and EU's Barroso. However, Merkel was very vague on any support Germany was prepared to give if another Euro-zone country would have financing difficulties. On the help from eastern European countries, the German Chancellor indicated that any such help should primarily go via the IMF. This was a disappointment from a euro point of view. On top of that, US stock markets failed to hold on to early session gains and drifted into the red later in the session, dragging the risk-sensitive euro lower, too. EUR/USD closed the session at 1.2674, compared to 1.2530 on Wednesday. Overnight, the steep decline in US bank stocks and additional losses on the Asian stock markets drive EUR/USD further south, reversing the remainder of yesterday's gains EUR/USD: rebound (again) short lived Support comes in at 1.2538 (Daily envelope), at 1.2513/04 (Reaction low/Boll Bottom), 1.2423/1.2399 (Targets double top), at 1.2331 (LT reaction low) and at 1.2263 (Starc bottom) and at 1.2132 (50% retracement). Resistance is seen at 1.2648 (Breakdown hourly), at 1.2692 (Reaction high), at 1.2759 (Reaction high), at 1.2785 (MTMA), at 1.2865 (Boll Midline). The pair is in oversold territory USD/JPY Today, eco calendar contains the first estimate of the European PMI's. They are expected to stabilize at a low level. In the US the CPI is scheduled for release. However, the debate on the intra-EMU/EU support will remain an important driver for the single currency. The declarations from German Chancellor Merkel yesterday were a bit disappointing. However, looking at it from a positive angle, it is good news that the debate on European support has stated. In this context, France Finance Minister Lagarde indicated that eurozone countries should try to find solutions without seeking the help from the IMF. In the same context, it was remarkable that the spreads of some hard hit countries like Ireland narrowed quite substantially yesterday. As usually in Europe, this process probably won't go fast, but we put it on our checklist as a potential factor of importance for EUR/USD trading. Since the start of the year, EUR/USD was on the defensive. The deterioration of the European government finances and the widening intra-government spreads continued to weigh on the single currency. The euro remains a pointer of global risk aversion. Negative headlines on the development of the global crisis often had a negative impact on the euro. The US eco story is also far from brilliant, but the dollar takes advantage from its safe haven status. Recently, the EUR/USD decline shifted into a lower gear but any attempts to change the trend immediately ran into resistance. The renewed flaring up of risk aversion and the market fear that the deepening of the crisis in Central and Eastern Europe might cause an new adverse loop for the European economy and its financial sector caused EUR/USD drop below the 1.27 support area earlier this week. The price action in EUR/USD is very much driven by global market sentiment and with major stock market indices still close to key support levels (we especially look at the S&P 500), the outcome of this test will also be the key factor for EUR/USD trading. EUR/USD is expected to remain on the defensive as long as global market uncertainty persists. From a technical point of view, the correction from mid December brought EUR/USD again in the previous sideways range (capped by the 1.3300 area). The pair tested several times the 1.2765/00 support area (previous low) and the break of this area deteriorated the picture for the single currency and opened to way for return action to the 1.2330 area (2008 low). A break below the 1.2330 area would signal big trouble for the single currency. Yesterday, the EUR/USD decline temporary drifted into a lower gear. However, this euro resilience apparently was again shortlived. In a day-to-day perspective, renewed stock market losses don't bode well for the EUR/USD performance today. On Wednesday, USD/JPY extended its gradual rebound. There was no high profile news to support the move, but rising concerns on the health of the Japanese economy become an ever important factor for the yen. Poor US data were no help for the yen anymore. USD/JPY closed session at 94.20, compared to 93.79 on Wednesday. This morning, Japanese eco data brought no big surprises. The Topix stock market index posted the lowest close since January 1984. Former vice Finance Minister for international Affairs Sakakibara (Mr. Yen) was quoted that the yen could fall to 100 in the days ahead as the Japanese economy is nearing recession. Looking at the charts, USD/JPY set a reaction low in the 87.15 area in December. Since then, the pair entered calmer waters. The long-term trend in the pair remains negative, but the downtrend ran out of steam below 0.9000 area (amongst others on fears Japanese officials will voice concerns on the ascent of the yen if USD/JPY comes closer to the 0.8710/15 reaction low). Recently, the pair even made a gradual rebound. The gains are not impressive, but the underlying yen-momentum obviously has weakened. This time, the yen decline was not driven by improved market risk appetite, but by rising worries on the Japanese economy. Since the end of last week, we have a cautious buy-on-dip approach in this pair. We hold on to that bias. The ST technical picture remains constructive. The break above the 92.42 resistance (previous high) opened to way for our MT 94.65 target. The nearing of this high profile resistance might temporary slow the recent up-move. USD/JPY: nearing key 94.65 area Support stands at 93.90 (Daily envelope), at 93.23 (STMA), 92.83/75 (Break hourly/daily), at 91.29 (Daily Flag bottom). Resistance comes in at 94.30/46 (ST high/Daily flag top/Boll Top), at 94.65 (Reaction high) and at 95.13/20 (MT break-down/daily envelope), at 95.92 (Daily downtrend line since 110.67). The pair is in overbought territory EUR/GBP On Thursday, EUR/GBP showed some intraday swings, but at the end of the day, the absolute change was not that big. This is a bit remarkable as there were data (and even more press headlines) on the deterioration of the budgetary and debt situation in the UK. The rescue measures/nationalization of (parts) of the banking sector will cause a sharp rise in the UK net debt. This is to some extent a 'technical' matter, but we take a close look whether rising debt/UK credit quality might become a factor of importance for the UK currency. EUR/GBP briefly dropped below the 0.8800 barrier early in European trading, but recouped the losses later in the session, due the UK budget debate and the overall better euro sentiment. EUR/GBP closed the session at 0.8866, compared to 0.8818 on Wednesday. Today, the UK retail sales are scheduled for release. Recently, various measures of UK retail sales often painted a very different picture. We don't have a strong view on the outcome of the figure but we're not overly confident that the UK currency will be able to bear much additional bad news, if it where to occur. At the start of 2009, EUR/GBP made a forceful correction after the spectacular gains mid-December. EUR/GBP tried to recapture the longstanding uptrend, but the rebound ran into resistance in the 0.95 area and another forceful correction even sent the pair (temporary) below the key 0.8840/00 neckline/support area. Last week, EUR/GBP tested the high profile support (0.8663 area previous high) but the test was rejected. The subsequent rebound called off the short-term alert in EUR/GBP and makes the picture neutral again. From a fundamental/LT point of view, we remain sterling cautious. Over the previous sessions we advocated that the 0.9085/0.9130 area could turn out to be a difficult hurdle short-term. In a day-to-day perspective, we are neutral for EUR/GBP and wait for a technical signal. ST trading is confined in the 0.8638/0.9072 trading range. EUR/GBP: sideways Support stands at 0.8789/78/72 (Reaction low/Breakdown daily + daily envelope/ST low), at 0.8689/80 (LT Break-up/Weekly envelope + Weekly Boll Midline) and at 0.8637 (reaction low). Resistance is seen at 0.8886 (Reaction high), at 0.8916/20 (daily envelope/Reaction high), 0.8944/53 (Break-down hourly/Boll Midline), at 90.11 (LTMA). The pair is in neutral territory. News US: Philly Fed business sentiment worsens sharply After the New York Fed, also the Philly Fed showed a sharper than expected drop in February, more than undoing the gains of the previous month. The headline index plunged from -24.3 in January to -41.3 in February. The breakdown shows a sharp decline in shipments (-32.4 from -16.7) and also new orders (-30.3 from -22.3), number of employees (-45.8 from -39.0) and average workweek worsened significantly. Prices paid (-13.7 from -27.0) came out higher, while prices received (-27.8 from - 26.2) fell somewhat. These figures indicate that producers are becoming again more pessimistic after the slight improvement in sentiment at the start of the new year. Producer prices rose by 0.8% M/M in January after falling by 1.9% M/M in the month before. On a yearly basis, PPI dropped by 1.0% Y/Y, while the consensus expected to see a decline by 2.4% Y/Y. Looking at the details, energy prices rose by 3.7% M/M due to a sharp increase in gasoline (15.0% M/M) and a 5.4% M/M increase in heating oil. Also prices for tobacco, civilian aircraft, light trucks and cars were rising. Core PPI, excluding food and energy, surprised on the upside as it rose by 0.4% M/M. These significantly higher producer prices might raise expectations that also CPI figures, released tomorrow, might come out higher than expected. In the week ended February 14, initial claims stayed unchanged at an upwardly revised 627 000, slightly above the consensus estimate of 620 000. Continuing claims, which are reported with a one-week lag, rose by 170 000 from 4 817 000 to 4 987 000. The total number of Americans collecting unemployment benefits is now close to five million, the highest level since the start of the series in 1967. But it might be important to note that the size of the labour force increased significantly since the start of the series. The leading indicators showed the second consecutive gain in January. The headline index rose by 0.4% due to a significant positive contribution from M2 money supply, the interest rate spread and consumer expectations. Negative contributions came from jobless claims and building permits. Other: Recession takes a toll on UK public finances In the UK, public sector net borrowing came out at -3.3B in January, while the consensus was looking for a figure of -7.0B. This outcome is weaker than expected and is the smallest budget surplus for the month January in 14 years. Traditionally, January has a big surplus as taxes are boosted by bankers' bonuses and it is one of the four months in the year that benefits from corporate tax payments. This year, tax income fell by 11% due to a 24% decline in corporation taxes, income taxes dropped by 4.3% and value-added tax plunged by 11% due to the 2.5% cut in VAT. These data indicate that the recession is taking a toll on public finances and these will also be hit 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.