Yen Extends Losses

Daily Forex Fundamentals | Written by KBC Bank | Feb 26 09 08:05 GMT |

Sunrise Market Commentary US Treasuries hit the skids Treasuries hit the skids as very weak Existing Home Sales couldn't trigger a positive momentum. A strong 5-year Note auction brought little support either, as an intra-day rebound of equities and ongoing supply concerns weighed. Busy calendar today with several eco releases, the 7-year Note auction and Obama's budget proposals the eye-catchers. Italian government bonds underperform ahead of today's auction German bonds again couldn't really benefit from the weak eco data and the losses on the equity markets. The short end outperformed on the back of the comments of ECB's Weber, but the Bund still trades below the contract high at 126.53. We consider this as a rather disappointing performance, which supports our buy-on-dips approach towards last week lows at 124.37 and not to front-run on a break higher. FX: yen extends losses A clear signal on the technical charts and the ongoing negative news flow from the Japanese economy keep the yen in the defensive against the dollar. Sterling faced a set-back on negative comments from BoE members. EUR/USD is still locked in the established lackluster trading pattern. The Sunrise Headlines US equities lost about 1.1%, but ended well off intra-day lows, digesting Tuesday's gains amid still ongoing nervousness on the stress test of the banking sector and overall weak economy. Industrials were weakest sub-sector. Asian equities trade with slight negative bias overnight. The US launched its 'stress test' program to judge banks' resistance to a deeper recession and to determine the level of capital its 20 biggest banks may need. Treasury Secretary Geithner stressed the government stands ready to support banks that need more capital, but won't run the banks or nationalize them. Obama will send its first budget proposal to Congress later today, opening the yearly budget battle in Congress. It should once more stoke supply concerns. Australian investment spending unexpectedly jumped 6% higher in Q4, suggesting the economy might have dodged a recession for now. The Aussi dollar barely reacted though. New Zealand business confidence deteriorated in February. Britain is expected to unveil a plan to limit banks' losses on about £500 B of risky assets helping to prevent full nationalization. RBS is expected to unveil a record loss and unveil a far-reaching restructuring plan. Following a downgrade of the Latvia rating, S&P now cut the Ukraine rating by 2 notches to CCC+, suggesting high chance on a default. S&P warned the IMF bailout package may be unraveling amid political bickering. Busy calendar today with EMU M3 and confidence survey, German unemployment and Länder CPI and US durable orders & claims key eco releases. Also US, UK and Italian bond auctions and CB speeches are worth looking at Currencies: Yen Extends Losses EUR/USD On Wednesday, EUR/USD more or less made the opposite move from the price action on Tuesday. EUR/USD was rather well bid early in the session mirroring the improved sentiment on global stock markets. At that time, the poor German export performance as revealed in the detailed Q4 GDP data had no lasting impact on trading. European stock market opened the session on a positive tone, and this helped the single currency to hold above the 1.28 mark during the morning session. However, underlying investor sentiment remained very fragile. S&P downgraded Ukraine's credit ratings and stock market indices gave up the early gains and so, EUR/USD came again under pressure. The poor US existing home sales were no help for the euro and EUR/USD declined to the 1.27 area late in the European session and the pair closed the day at 1.2723, compared to 1.2846 on Tuesday. However, in fact yesterday's decline was nothing more than a simple reversal of Tuesday's gains. So, from this point of view, the balance of uncertainties persists and prevents EUR/USD to clearly move in one way or another. EUR/USD: indecisive trading pattern persists Support comes in at 1.2662 (Week low), at 1.2637 (break-up hourly), at 1.2588 (daily envelop), at 1.5775/49 (Boll Bottom/weekly envelope) and at 1.2513 (18 Feb low). Resistance is seen at 1.2761 (reaction high/MTMA), at 1.2805 (Boll Midline), at 1.2846 (Daily envelope), at 1.2908/33 (breakdown hourly/LTMA) and at 1.2991 (Current week high). The pair is in neutral territory USD/JPY Today, the eco calendar is rather well filled. In the US, the durable orders; the jobless claims and the new home sales are on the agenda; in Europe markets watch out for German labour market data, the EU confidence indicators and the M3 money supply data. The data are interesting, but recently had most often no lasting impact on trading. Global market factors and especially the developments in the financial sector (both in the US and elsewhere) will continue to have a big impact on 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 remains a key factor for EUR/USD trading. At least for now, the news flow doesn't contain many positive headlines that might help sentiment to change in favour of the euro anytime soon. 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 correction to Tuesday's 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 Wednesday, USD/JPY extended the gains from the previous sessions. It becomes ever more obvious that the Japanese currency is losing its safe haven status. Negative Japanese eco data (like yesterday's trade data) are becoming increasingly a reason to scale back yen long exposure. Negative news (even in case it comes from the US) most often tends to support the dollar, even against the yen. Tuesday's, swift break above the key 94.65 resistance spurred additional buying in this pair. USD/JPY close the session at 97.39, compared to 96.64 on Tuesday evening. This morning, USD/JPY trades again a few ticks higher compared to yesterday's close. Weekly flow data this morning showed foreigners last week sold Japanese bonds and stocks and that Japanese investors bought foreign stocks and bonds. The link of this kind of data with the yen is not one-to-one, but it might fuel the yen negative sentiment. Most Asian stocks markets trade slightly lower. Chinese stocks this time underperform most of their Asian counterparts. 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 and this rebound accelerated last week and early this week. 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 up-move. However, Tuesday's break above 94.65 cleared an important hurdle making ST picture for USD/JPY positive. The next important resistance comes in the 100.55 (04 Nov high/102.20 2nd target double bottom off 94.65). USD/JPY: double bottom pattern confirmed. Support stands at 97.12 (daily envelope), at 96.34 (Reaction low), at 96.00/95 (Break-up/STMA), 94.94 (St break up) and at 94.24/12 (Reaction lows). Resistance comes in at 97.97 (today high), at 98.45 (Starc top), at 98.88/00 (50% retracement/daily envelop), at 99.20 (1e target double bottom), at 100.55 (LT reaction high). The pair is in overbought conditions EUR/GBP On Wednesday, EUR/GBP extended Tuesday's rebound. In this respect, EUR/GBP decoupled from the price action in EUR/USD. The details of the UK Q4 GDP brought no big surprises, but at least for now the decline of sterling was no big help for the export sector. Later in the session, a series of negative headlines from an article of BoE's Barker and a speech from BoE's Blachflower also added to the sterling negative sentiment. BoE's Barker expect that the weak sterling will prompt a shift away from imports. The uncertainty on the additional plans to be announced for the UK banking sector might have weighed on sterling, too. EUR/GBP closed the session at 0.8956, compared to 0.8871 on Tuesday. This morning the Nationwide house prices came out (slightly) weaker than expected at -1.8% M/M and 17.6% Y/Y. Markets will look out for the details of a new UK bank ing plan. According, to market rumours, the plan could include a £ 500 bln guarantee for risky bank assets. We don't have a strong view on the implication of this plan for ST sterling trading. However, the ever growing involvement of the UK government in the banking sector illustrates a structural risk for the UK financial position over time. 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. There are some tentative signs that the bottom in the pair becomes a bit better protected, but we don't want to font-run on this as long has we don't get a clear technical signal EUR/GBP: sideways Support stands at 0.8917/0.8898 (Reaction low/Break-up hourly), at 0.8889/71 (STMA + Boll Bottom/ Daily envelope), at 0.8814 (reaction low), at 0.8749 (Breakup hourly), at 0.89726 (Week low). Resistance is seen at 0.8879/87 (Reaction high/MT reaction high), at 0.9005/20 (LTMA/daily envelope), 0.9060 (Boll top), at 0.9072/83 (MT Reaction highs). The pair is in neutral territory News US: Existing home sales show unexpected decline In January, existing home sales dropped by 5.3% M/M to 4.49M; while the consensus was looking for a modest increase. The previous figure was downwardly revised from 6.5% M/M to 4.4% M/M. Looking at the details, sales of condo's dropped by 10.2% M/M, while sales of single family homes fell by 4.7% M/M. Months supply rose from 9.4 in December to 9.6 in January. Both median and average prices came out lower. These data indicate that the worst is not over and the uptick in sales of existing homes in December was only temporary. In the coming months, it will be interesting to see whether the Obama housing plan will start having its impact. 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.