Sunrise Market Commentary

Daily Forex Fundamentals | Written by KBC Bank | Mar 12 09 08:33 GMT |

US Treasuries rebound as test support fails Treasuries staged a late session rally, as important technical levels held. The 10-year Note re-opening went well, but not exceptional. Today, the monthly refunding concludes with a 30-year bond re-opening, but also retail sales and claims might be interesting. Rebound Treasuries may continue today. Swiss National Bank, the next to start a quantitative easing policy? Yesterday, German bonds fell further off the highs tested earlier in the week, as equities held on to their strong gains of Tuesday. Overnight gains in US Treasuries and weaker Asian equities however resulted in a higher opening today. We continue to favour a buy-on-dips strategy. First important support is seen at around 122.97. Euro loses ground versus dollar, while yen strengthens against dollar Currency markets still have difficulties to find direction, but USD/JPY entered correction mode and also sterling seems to have re-found its composure (versus euro). Risk aversion might be the theme for today's trading. The Sunrise Headlines US Equities had difficulties to choose their side after the impressive rally on Tuesday. Dow/S&P ended the session slightly higher (+0.06% / 0.024%) led by financials and materials. Today, most Asian stocks trade slightly lower. World Bank President Robert Zoellick said in a newspaper interview that the global economy was on track for its worst recession since the 1930s with output likely to shrink by 1-2% this year. He added that central and eastern European countries were particularly vulnerable urging rich nations to do more to fill the financing gap. The Reserve Bank of New Zealand cut interest rates by 50 basis points to 3.00%, an all-time low and indicated that rates won't be lowered to near-zero and future rate cuts will be smaller. South Korea's central bank decided this morning to keep rates unchanged at 2% , but signaled more rate cuts to come. The government also announced a $4.2 billion package in extra measures to stimulate consumption. Crude oil ($42.97) declined on Wednesday after a US report showed inventories rose more than expected. Today, the calendar contains the German industrial production figures, US retail sales and weekly claims Currencies: Euro Loses Ground Versus Dollar, While Yen Strengthens Against Dollar EUR/USD On Wednesday, global equity markets tried to build on the positive sentiment from Monday. EUR/USD tried a second attempt to regain the 1.2750 area. The price action was again driven by the performance of the equity markets. The Eco data had no impact on currency trading. German factors orders collapsed in January (-8.0% M/M and -37.8 Y/Y!!), but currency markets ignored it completely. So, EUR/USD rebounded from the 1.2650 area at the start of trading in Europe and revisited offers in the 1.2800 area early in US trading. Short-term investors apparently fear some kind of remake from Tuesday's scenario and the move again ran into resistance. However, the euro bears didn't show up to push the pair again down. This set the stage for a late session move higher breaking the 1.28 level and closing at 1.2836, a decent gain from Wednesday's 1.2682 closing value. We are a bit skeptical about this late session break higher and at the time of writing, the pair is again downwardly oriented and trades around 1.2770. It seems that the global market embraces today again the risk aversion theme that is favourable for the dollar at least versus the euro. EUR/USD: disappointing euro performance Support comes in at 1.2790 (reaction low hourly/broken LTMA), at 1.2735/18 (Daily envelope + STMA), at 1.2682 (MTMA), at 1.2610 (Reaction low). Resistance is seen at 1.2870 (week high), at 1.2897/1.2902 (3e target triple top/ Bollinger top), at 1.2991 (Reaction high). The pair is in overbought territory USD/JPY Today, the calendar contains German production data. In the US, the retail sales are in the focus of attention. Recently, even high profile eco data most often only had a limited impact on currency trading. Stock markets and global risk appetite were the drivers for EUR/USD trading. Nevertheless, the US retail sales remain important and it will be interesting to see whether global markets will be able to ignore a negative surprise, if it where to happen. US Treasury secretary Geithner testifies to the senate Budget committee. Global context. Since the start of the year, EUR/USD was on the defensive. Europe was seen more vulnerable to the global crisis and less flexible in addressing the fallout from the financial turmoil. The deterioration of the European government finances and the widening intra-government spreads was seen as an illustration of the intra EMU tensions and fuelled the euro-negative sentiment. On top of that, the euro remained a gauge of global risk aversion. The US story has also been far from brilliant, but the dollar took advantage from its safe haven status. Since mid-January, the EUR/USD decline shifted into a lower gear but any attempt of the euro to regain ground immediately ran into resistance. Mid-February, market fears 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. This illustrated the euro skeptic sentiment. A sustained change in the global negative sentiment is needed to give the euro some better downside protection. As long as this context persists, a sustained euro rebound is not evident. Recent euro price action only confirms that a big rebound in EUR/USD is not that evident, even in case of a temporary improvement in investor risk appetite. Nevertheless, the downside in the pair has become better protected (no new ST low at the end of last week). 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 ST 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 more trouble for the single currency. For now this is not our preferred scenario. We remain neutral short-term. Range trading in the 1.2457/1.2992 range is preferred. On Wednesday, USD/JPY corrected lower and that movement continued overnight. There was no particular news item behind the move. The dollar traded weaker across the board. In previous days, it became more and more apparent that the strong USD/JPY rally that brought the pair in less than one month from about 90 to 99.68 was running out of fuel. So profit taking kicked in. Japanese GDP was marginally revised higher but at -3.2% in Q4 of 2008 was of course still a shocker. However, we don't think the revision is behind the rise of the yen overnight. It is still profit taking combined maybe with some sense that the equity rally had run its course, even if recently the yen didn't profit like before from risk aversion. Global context. 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 90.00 area. Recently, the pair even made a decent rebound that accelerated over the previous two weeks. The underlying yen-momentum obviously has weakened. The market questioned the safe haven status of the Japanese currency and grew more worried on the performance of the Japanese economy as faltering exports clouded the eco picture. Over the last two weeks, we had a buy-on-dips approach in this pair. The break above the key 94.65 resistance improved the ST picture further. At the end of last week, the USD/JPY rebound lost momentum, opening the way for a corrective profit taking move. Next important resistance comes in the 100.55/102.20 (04 Nov high)/2nd target double bottom off 94.65). We turned neutral on USD/JPY as we have the impression that this resistance area will be tough to break in a first attempt. A decline below 96.50, under test, would deteriorate the picture (stop loss protection on longs). USD/JPY: in correction mode following strong rally Support stands at 95.99 (today low), at 95.50 (weekly STMA), at 94.94/88 (break-up daily/38% retracement), at 94.24/12 (reaction lows hourly). Resistance comes in at 96.76 (breakdown hourly), at 97.86 (STMA), at 98.09 (daily envelop) and at 98.71 (reaction high hourly) The pair is in neutral territoryu EUR/GBP On Wednesday, EUR/GBP continued to move higher, building out the rebound that started at the end of last week. Regarding the data, the UK trade balance data came out worse than expected. Monthly trade balance data are very volatile and difficult to interpret. However, sterling weakness didn't provide a big support for UK trade, yet. Nevertheless, yesterday's price action still should be considered as follow-through gains on the technical break that occurred on Monday. This break was triggered by the UK banking woes and by the uncertainty on the potential side-effects from the aggressive BOE quantitative easing. With respect, to the latter, the BOE yesterday organized its first reverse Guilt auction to buy UK Gilts. The execution and the announcement of the results of the auction had no visible impact on the intraday EUR/GBP chart. EUR/GBP continued its uptrend and tested bids in the 0.93 area during the US trading session. Later the euro rally shifted into a lower gear and sterling fought back erasing part of the earlier losses. EUR/GBP closed the session at 0.92537, still a gain compared to the 0.9224 close on Tuesday. Today, the UK eco calendar is empty. However, later in the session, BoE Barker speaks about deficits, debts and monetary policy. Overnight, EUR/GBP fell again as global euro weakness was the theme. Also here we would consider the down-move as a correction following a good rally. Global Medium term context. At the start of 2009, EUR/GBP made a forceful correction after the steep gains mid-December. A first rebound ran into resistance in the 0.95 area and another forceful correction even caused the pair to test 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 made the picture neutral again. From a fundamental/LT point of view, we remained sterling cautious. Until the end of last week, sterling weathered the quantitative easing debate rather well. However, the BoE taking an ever more aggressive approach in its quantitative easing and the growing government involvement in the financial sector apparently get more market attention and have a negative impact on sterling. Over the precious sessions EUR/GBP moved above a downtrend line from the highs and on pair also cleared the more important 0.9085/9130 area, making the technical picture positive for now. In a day-to-day perspective, the EUR/GBP rebound might shift into a lower gear. Nevertheless, we maintain our buy-on-dips approach. The 0.9519 reaction high is the next high profile resistance on the charts EUR/GBP: sterling remains in the defensive, but rally is running out of steam Support stands at 0.92.33/29 (Broken daily Boll Top/daily envelope), at 0.9189 (Reaction low hourly), at 0.9168/50 (STMA/reaction high). Resistance is seen at 0.9301 (week high), at 0.9358 (62% retracement), at 0.9370/83 (daily envelope/Starc top), The pair is in overbought territory. News EMU: another sharp weakening in German factory orders German factory orders surprised again on the downside in January. On a monthly basis, factory orders plunged by 8.0% M/M, while a much softer decline was expected (-2.0% M/M). The December figure was downwardly revised from -6.9% M/M to -7.6% M/M. Looking at the details, weakness was broadly based with a 9.1% M/M decline in capital goods, but also orders for consumer- (-6.7% M/M) and intermediate goods (-6.8% M/M) were extremely weak. On a yearly basis, factory orders are down by a stunning 37.9% Y/Y. This outcome raises expectations GDP will shrink further in the first quarter of 2009, maybe at the same disastrous fast pace as in Q4 2008. Other: UK trade deficit widens due to non-EU demand In the UK, the trade deficit widened to £3585 in January, while the December figure was upwardly revised from -£3611 to -£3248. Looking at the details, exports dropped by 5% M/M, while imports fell by 1% M/M in January. Especially exports to non- European Union countries fell sharply. In the coming months, both imports and exports are forecasted to remain weak 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.