Sunrise Market Commentary

Daily Forex Fundamentals | Written by KBC Bank | Feb 24 09 08:37 GMT |

US Treasuries eke out small gains in rollercoaster ride Treasuries corrected sharply lower initially as there was hope equities would find their composure following talks between the Treasury and Citi. However, in the US session equities crumbled allowing Treasuries to recoup losses with the longer end even eking out small gains. Today, equities, supply and Bernanke key factors for trading. ECB's Trichet warns for a credit crunch Yesterday, German bonds gained only moderate ground in spite of the huge losses on the equity markets. This is somewhat disappointing and may indicate that the underlying sentiment is not that bullish. As such, we don't front-run on a break higher in the Bund, but prefer a buy-on-dips approach. Intra-EMU spreads narrowed further, but more bank rescue packages (in the euro zone) may reverse this trend again. Euro weakness and yen losing safe haven status highlights After EUR/USD tested 1.30 early in the session, heavy selling kicked in driving the pair sharply lower in the close. Trichet speaking of a credit crunch and later on equity weakness were the drivers behind the sell-off. USD/JPY moves higher and tries to establish a bullish double bottom formation. The Sunrise Headlines US equities crumbled with the S&P and Dow down 3.4%, as concerns about the financials (-3%) mounted, but similar concerns about the economy pushed down materials (-6.2%), industrials (-4.7%) and IT (-4.4%). S&P closed at intra-day lows and also at cycle lows. Asian equities show weakness too. According to sources, AIG is looking for more government support as it will probably unveil its largest ever quarterly loss ($60B?). Government might convert its preferred shares to common shares. This might also be the issue of talks between Citi and the government. ECB's Trichet said yesterday that reform needed to be 'holistic' and that the current crisis was a 'loud and clear call' to extend regulation to all important markets that pose fundamental risks to financial stability, including hedge funds and rating agencies. The Japanese Finance Minister said the government was looking at buying stocks and other methods to support the share market, which is close to 27-year lows. JP Morgan surprised investors by slashing its dividend by 87%, to 5 cents a share. The bank said that 'extraordinary times call for extraordinary measures'. Banque Populaire and Caisse d'Epargne will receive up to €5 billion in additional state aid, France's Finance Minister said yesterday. Crude oil ($38.05) declined further on Monday as US stocks dropped to new cycle lows. Today, the calendar contains German IFO indicator, euro zone industrial orders, CBI distributives trade report, US consumer confidence and Richmond Fed. Bernanke will testify before the Senate Banking Committee Currencies: Euro Weakness And Yen Losing Safe Haven Status Highlights EUR/USD On Monday, EUR/USD traded very volatile, but ended the session well below opening levels. Initially, the pair extended the gains from Friday evening and at the start of trading in Europe it even looked as if the pair was heading for a test of the 1.30 barrier. However, as was often the case recently, the single currency hit a wall and snowballed lower in a movement that would last up into the close. Even an initial rebound on the European stock markets was not enough to give the single currency a lasting support. There was no high profile economic news to guide the price action. ECB's Gonzales Paramo warning that (European and other) countries may face solvency problems might have fuelled the euro-skeptic sentiment, but narrowing intra- EMU yield spreads and a rally of the battered Central European currencies didn't really support that view/sentiment. ECB president speaking about a credit crunch in EMU qualifies as a better explanation for the euro weakness in the European session. At the start of US trading, the joint US banking regulators published a statement indicating that they will continue to provide the US banking sector with sufficient capital. However, the statement hardly brought any relief and stock markets turned again south. Risk aversion may now have played a role in the further slide of EUR/USD pair that eventually closed the session at 1.2694, compared to 1.2826 on Friday evening. EUR/USD: euro remains in the defensive Support comes in at 1.2664 (today low), at 1.2637 (break-up hourly), at 1.2603 (Daily envelope), at 1.2549/47 (Weekly envelope/ Boll Bottom) and at 1.2513 (Reaction low). Resistance is seen at 1.2792 (MTMA), 1.2851 (daily envelope), at 1.2908 (Breakdown hourly) and at 1.2991 (LTMA/current week high). The pair is in neutral territory. USD/JPY Today, the eco calendar contains a series of interesting data and events. In Europe the German IFO survey and the European industrial orders are scheduled for release. In the US, investors will look for the Consumer confidence and house price data, for the semi-annual testimony of Fed chairman Bernanke, a 2-year Note auction and last but not least for equities, as the S&P is now at the very key 741 level, that if broken might trigger another, maybe violent selling wave. While the situation on the equity market is serious and disconcerting, a sustained drop lower isn't a done thing, keeping us neutral with regard to the chances of a break. However, as long as there is no sustained improvement in the equity markets, the underlying sentiment may be euro negative and this might be the case also today, even as EUR/USD tries to climb higher in the Asian trading. A weaker-than-expected IFO, where we put the risks, would be a first test of the fragile more positive euro sentiment at the onset of 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 fuelled a euro-negative sentiment. On top of that, the euro remained a gauge 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 continued to take advantage from its safe haven status. Since mid January, 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 market fear that the deepening of the crisis in Central and Eastern Europe might cause a new adverse loop for the European economy and its financial sector caused EUR/USD to drop below the 1.27 support area last 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 a key factor for EUR/USD trading. Yesterday morning, we raised the question whether the EUR/USD rebound (on Friday and yesterday morning) would be an indication of a more USD cautious market attitude. Yesterday's EUR/USD decline suggests that the answer to this question remains negative for now. 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 brought the 1.2330 area again in the picture (2008 low). A break below the 1.2330 area would signal big trouble for the single currency. In a day-to-day perspective, yesterday's swift correction to the earlier rebound only confirms the picture that the topside in EUR/USD is capped. Range trading in the 1.25/1.31 range looks the most viable scenario for now. On Monday, USD/JPY also showed very interesting price action. On Friday evening and on Monday morning it looked as of the test of the Key 94.65 support area would be rejected and that USD/JPY rebound was losing momentum. However, the yen rebound/dollar correction was very short-lived and EUR/USD returned to high 94 area early in US trading. Looking at other cross rates the move was probably due both to underlying dollar strength and yen weakness. Risk aversion and a decline in the major stock market indices are no longer enough to spark (aggressive) yen buying. USD/JPY closed the session at 94.61 compared to 93.35 on Friday. This morning, the pair continued to move higher and currently trades in the vicinity of 95.20, which if sustained would pair a double bottom on the charts with neckline at 94.63. The Nikkei continues its descent overnight, but is currently well off intra-day lows. Fin Min Yosano said falling equities were a concern and added that the government was studying ways to help the equity market. The BOJ Minutes showed that some members wanted the BOJ to try to influence term interest rates, while many members called for a close watch on corporate financing. All in all, the break above the 94.63 level is an important driver today, but also investors seem to re-position away from yen as it seems to have lost its safe haven status. Indeed, currently the dire strait of the Japanese economy and the perceived inability of the government to take firm action to fight the recession prime on the safe haven status. 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 really spectacular, 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. Last week, we had a cautious buy-on-dip approach in this pair. On Friday, the pair came close our first short-term target (target 94.65, reaction high 94.38) and the nearing of this high profile resistance temporary slowed the recent up-move. Yesterday, we adopted a wait-and-see approach for USD/JPY, but if the move above 94.65 would be confirmed, which looks more likely, it would improve the USD/JPY sentiment.. USD/JPY: tries to set double bottom which if confirmed would have major implications Support stands at 9425/12 (STMA/reaction low hourly), at 93.75/64 (daily envelope/break-up hourly), at 92.74/44 (week low/MTMA), 92.21 (weekly envelop). Resistance comes in at 95.44/52 (daily & weekly envelop/3e target inverted H&S hourly), at 95.69 (Daily downtrendline), at 95.84 (23% retracement), at 96.10 (38% retracent from 110.67). The pair is in overbought conditions EUR/GBP On Monday, EUR/GBP joined the broader decline of the single currency. We didn't see much sterling positive news to explain this move, but there was some market talk on additional measures to address the problems in the UK banking sector. Market rumours that RBS might announce plan to split into two (Good Bank/Bank plan) might have played a role. Whatever the driver, EUR/GBP was sold off quite aggressively and the pair closed the session at 0.8756, compared to 0.8891 on Friday. Today, the UK calendar contains the Q4 business investment, the BBA Loans for House purchases and the CBI quarterly distributive trades. Especially the later deserves some attention after last week's weeks better than expected UK retail sales. However, we expect global marker sentiment and the headlines from the banking sector to remain the key drivers for EUR/GBP trading. 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. Last week, 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 remain 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 0.8728/24 (today low/weekly Bollinger midline), at 0.8698 (daily envelope) and at 0.8637 (Reaction low/Bollinger bottom). Resistance is seen at 0.8816 (STMA) 0.8838 (daily envelope), 0.8856 (MTMA), at 89.20 (Reaction high hourly). The pair is in neutral territory. News US The Chicago National Activity index sinks ever deeper and is now at its weakest since the 1973-75 recession, when the index troughed at -3.94. In January, the 3- month average CFNAI index, the preferred gauge, fell to a new low of 3.41 from a revised -2.70 in December. The monthly index showed a modest improvement to - 3.45 from a downwardly revised 3.65 in December, earlier reported as -3.20. In the Chicago Fed methodology, a value below -0.70 means that the economy has fallen into recession with a 70% probability. The report confirms the early indications from the manufacturing survey that the pace of the downturn has not yet stabilized 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.