Currencies: Dollar Remains Under Pressure, As Risk Appetite Improves Further

Daily Forex Fundamentals | Written by KBC Bank | Oct 20 09 07:26 GMT |

Sunrise Market Commentary Technicals prevent bonds from more losses, as equities continue to power ahead Yesterday, equities and commodities gained further ground, putting bonds again under pressure. Technical support levels however held and bonds rebounded further out in the session. For now, we hold on to a sell bonds on up-ticks approach. Dollar remains under pressure, as risk appetite improves further Another day, another low for the trade weighted dollar. Commodity currencies are doing great, but EUR/USD near the eye-catching 1.50 level. Strong results of Apple might prolong equity rally in the European session, but later on a slew of new results will be closely scrutinized as the bar for the results should have been raised in step with the rally. The Sunrise Headlines In a rather dull session, US Equities reversed Friday's losses on optimism about the remainder of the third quarter earnings season. The Dow jumped back above the 10 000-level. This morning, Asian shares climb higher after both Apple and Texas Instruments reported better than expected earnings after the US closure. Fed Chairman Bernanke called on the US to save more by cutting the federal deficit and added that Asian nations should promote domestic consumption to avert a return of trade distortions that preceded the financial crisis. Euro zone finance ministers agreed on Monday to start forcefully cutting budget deficits in 2011 if forecasts from the European Commission point to economic recovery in 2010 and the following year. The Australian central bank shifted its emphasis to inflation from growth the minutes of last meeting showed. The Bank also indicated that it would raise rates further, leading markets to price in at least two rate hikes before the end of the year and push the Aussie to a 14 month high. Crude oil prices rose further on Monday, nearing the $80 a barrel level on growing optimism about the economy. Gold climbed closer to last week's highs as the dollar fell to a 14-month low. Today, the calendar contains the UK pubic sector finance data, US housing starts and permits and PPI. Du Pont, Coca Cola Co, Pfizer, Caterpillar and Yahoo will announce earnings. EUR/USD On Monday at the start of a new trading week, risk appetite unmistakably dominated all markets. At the end of last week, investors apparently were considering whether it wasn't the time to book profit on the recent stock market gains after GE and BoA results didn't satisfy the high expectations. A similar sign of fatigue was visible on the EUR/USD charts. However, this investor caution was very short-lived. Without much concrete news, European equity markets started the week strongly, even if there was no higher profile corporate news to support the rally. This positive global investor sentiment also blocked the downside in EUR/USD. The increased risk appetite wasn't limited to equities though as most commodities and oil in particular did well, adding to the negative sentiment for the US dollar. So, EUR/USD swiftly recouped the Asian losses and settled above the 1.49 mark. During the day, there was a lot of market talk on a meeting of the euro-group of Ministers of Finance, which might temporarily have helped the dollar as EUR/USD re-tested the 1.49 mark, but the latter held and more equity strength send the EUR/USD pair again higher and towards a 1.4965 close that compares to the 1.4904 close on Friday. Overnight the pair even shyly approached the 1.50 psychological key level, but the pair changes currently hands little changed at 1.4973. The euro-group meeting didn't bring much new info on the EUR/USD rate and thus had little impact on the market, as chairman Juncker said the group sticks to the G-7 statement on forex and shares US views on a strong dollar. Juncker added that they didn't like volatility in forex markets. The French Finance Minister Lagarde added later that she is preoccupied about the euro levels while Trichet kept to its standard commentary. The Dutch Minister would have said that the strong euro reflected the strength of the European economy. Fed chairman Bernanke said that the performance of the US economy and of the dollar will depend on the government's success in controlling the budget deficit. He added the Obama administration recognized the need for a fiscal exit strategy. His words followed the publication late on Friday of a record $1.4 Trl. 2009 fiscal deficit. The remarks might have been damage control and were not specific enough to incite dollar buying. On the contrary, the statement of the NY Fed that the reverse-repo test should not be considered as a sign of an imminent tightening of monetary policy underlines that it the extremely easy monetary policy, one of the reasons of the dollar weakness, might be kept unchanged for longer. EUR/USD: uptrend well in place as the 1.50 threshold is now within striking distance Support comes in at 1.4940/36 (STMA/reaction low hourly), at 1.4906/1.4899 (daily envelop/reaction low hourly), at 1.4829 (week low), at 1.4804 (MTMA), at 1.4745 (Boll Midline) and at 1.4609 (LT uptrend line). Resistance stands at 1.4994 (new high), at 1.5021/32 (2nd target double bottom/weekly/daily envelopes), at 1.5150 (Starc top) and at 1.5164 (76% retracement from 1.6040). The pair is in overbought conditions. USD/JPY Today, the US calendar contains the PPI (no market mover) and the housing starts & building permits that have more potential to move the market. As usual, any impact on EUR/USD will occur via the reaction on the stock markets. With respect to the latter, Apple and Texas Instruments reported overnight strong and stronger-thanexpected earnings, that bolsters the bullish sentiment, at least at the onset of trading. A number of bellwethers will report before the open today, which may still affect equity trading and thus affect the dollar. Global context: recently, the swings in risk appetite/risk aversion were the drivers on the currency markets. In this context, improving investor sentiment towards risk is still considered a good reason to sell the US dollar. On top of that, in this low yield environment, the dollar has become (or is at least perceived to have become) the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs, some international debate on the status of the dollar and the Fed's intention to run an expansionary monetary policy for a prolonged period of time offer additional ammunition for carry traders to use the dollar rather than other currencies. This has put the dollar in a vulnerable position. We stay dollar skeptical as long as we don't get a clear signal that the Fed is coming closer to scale down its stimulating monetary policy. Nevertheless, the ongoing building up of USD short positions at some point will trigger a ST correction (cf. the price action in sterling last week). Such a correction most probably will occur in step with the stock markets. Nevertheless, we still have the impression the EUR/USD market is becoming (too?) heavily positioned to the upside. Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 and above the 1.4919 (Dec high) improved the picture, but the move continued to develop in a rather gradual way. Nevertheless, the corrections are very limited, too. We still don't feel any need to row against the tide. However, as we come closer to the 1.50 mark and to our long-standing technical target of 1.5021 (2nd target double bottom of 1.3739), we become more cautious on the ST upside potential in the pair. Partial profit taking on standing EUR/USD long positions can still be considered. We wait for a correction to (re)establish EUR/USD long exposure. On Monday, USD/JPY showed some technically driven, intraday swings, but after all the currency joined the broader dollar negative trend. Higher equities and rising commodity prices drove the dollar lower and USD/JPY this time was no exception to this rule. The Minutes of the RBA (Australia) showed that the central bank switched its attention from supporting growth to fighting inflation, which means that the RBA may already hike its rates again at the next meeting. This (and commodity strength) pushed the Aussie dollar to a new 14 month high and supported the likes of the Kiwi and the Won. The trade weighted dollar as a result continues its downtrend, setting new lows also every day. This morning, the yen strengthened further on the general dollar weakness story, supporting the view that the upward correction of the pair last week was over. There was little new info coming from Japan. The leading indicators for August were confirmed little changed and the more important machine tool orders are not yet published. The Nikkei is up 1%, but doesn't distinct itself with other markets making it no factor in the forex markets. Global context: USD/JPY reached a reaction high in the 97.80 area early August. Despite positive global investor sentiment, the dollar could not hold on to its gains against the yen. The link between USD/JPY and global investor risk aversion/risk appetite became less tight and sometimes it even reversed. The dollar (and not the yen) was said to have become the preferred funding currency for carry trades. So, the price action in USD/JPY more or less joined the global dollar trend (decline). The long-term trend obviously remains USD/JPY negative. However, recently, we turned more cautious on USD/JPY shorts on technical considerations. On top of that, the change in talk from the Japanese authorities also slowed the ascent of the yen. So, the situation in USD/JPY has become a bit paralysed. Recently, we indicated that we were looking to sell into a more pronounced up-tick, hopefully in the 92/93 area, but we had become a bit worried whether this level would be feasible. Last week, the pair moved above the first important resistance area at 90.50, but the move didn't go much further. We keep a wait-and-see approach and still hope to get the opportunity to resell higher. USD/JPY: downtrend intact and most recent upward correction completed Support is seen at 90.03(Reaction broken weekly STMA), at 89.90 (break-up daily), at 89.69 (weekly envelop/MTMA), at 89.31/26 (Reaction lows hourly) and at 88.83 (last week low). Resistance comes in at 90.80 (reaction high hourly), at 91.15 (week high), at 91.33/41 (last week high/Bollinger top), at 91. 74 (38% retracement), at 92.55 (21 Sep high). The pair is in neutral territory EURGBP On Monday, trading in sterling still developed in a nervous and volatile way. Early in European trading, sterling faced some headwinds as investors focused on an interview with BoE's Posen. He indicated that the BoE must continue its policy of quantitative easing because the financial system has yet to recover fully. EUR/GBP jumped from the 0.91010 area at the start of trading in Europe to test offers in the 0.9190 area. Better than expected Rightmove house prices were ignored at that time. However, in order driven trade (there were no eco data on the UK calendar), sterling again found a better bid and erased all the intra-day losses. Apparently, the market was still sterling short, even after last week's violent correction. The adjustment process is still ongoing. The pair closed the session at 0.91104, little changed from the 0.9112 close on Friday evening. So, a second test of the key 0.9080 area didn't occur. Later today, the UK eco calendar contains the money supply data and the monthly budget data, usually no market movers, but we keep an eye on the monthly budget data. After the close more importantly, BoE's King will give a speech in Edinburgh. Market will probably already look forward to BoE minutes (to be published on Wednesday) and the Q3 GDP data (scheduled for release on Friday). This means that today's EUR/GBP trading might be dominated by technical oriented elements and the global sentiment. Global context: Since early August, sterling sentiment deteriorated again. The August BoE decision to raise the asset purchase program to £175B and Governor King's call for an even greater effort indicated that the Bank intended to maintain a loose policy for a prolonged period of time. This triggered a new sterling selling wave. At the September meeting, the BoE took no additional policy steps. Nevertheless, the (monetary) picture stays sterling negative and more BoE talk on the positive effects of sterling weakness for the UK economy reinforced investors' feeling that the BoE was happy with the course of events. We have a long-standing sterling negative view and don't feel any need to change it. However, recently we advocated some caution on the recent steep EUR/GBP rise. We were looking to add/reinstall EUR/GBP long positions around first important support area at 0.9080. A break below the latter would suggest that the short-term negative bias toward sterling is changing, which isn't our preferred scenario though. For now we maintain a wait-and see approach and look out whether the correction has run its course. If the 0.9080 area would give away, 0.8984 is the next point of reference EUR/GBP: tests 0.9080 support area not over yet. Support comes in at 0.9112 (today low), at 0.91/9094 (week low/last week low), at 0.9078 (3O Sept low/neckline double top), at 0.9061/54 (Break-up daily/LTMA). Resistance is at seen at 0.9148 (breakdown hourly), at 0.9176 (STMA), at 0.9190 (STMA) and at 0.8220 (MTMA). The pair is in neutral conditions News US: home builders' confidence unexpectedly worsens US Home builders' confidence unexpectedly deteriorated in October. The NAHB housing market index dropped from 19 to 18, while the consensus was looking for a slight improvement (to 20). The NAHB's chief economist added that builders are experiencing the effects of the expiring tax credit on their sales activity, since it would be virtually impossible at this point to complete a new home sale in time to take advantage of that buyer incentive. In the coming months, it will be interesting to see whether the expiring government incentives will also have their impact on sales. Of course, the Congress might decide to prolong the measures. 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.