Currencies: Dollar Slide Contiues

Daily Forex Fundamentals | Written by KBC Bank | Oct 14 09 07:34 GMT |

Sunrise Market Commentary Global bonds extend rebound after US trading resumes, but sentiment remains fragile Yesterday, bonds extended Monday's rebound after US trading resumed following Columbus Day Holiday. Strong earnings from Intel and ASML overnight and a strong performance of the Asian equity markets point to a higher opening of the European and US equity markets today. A sustained break higher would hurt the bond markets. Dollar slide contiues On Tuesday, the slide of the dollar continued, even as the global context was not really dollar unfriendly with equities falling prey to a (limited) profit taking move. The EUR/USD 1.50 mark is coming within reach. Sterling remained under pressure early in the session, but the storm calmed down despite a lower than expected UK CPI The Sunrise Headlines On Tuesday, US Equities ended slightly lower after a six-day rally. Dow/S&P lost 0.15% / 0.28% led by financials and healthcare. This morning, most Asian shares gain after upbeat economic data from China and Australia. The Bank of Japan left rates on hold, but upgraded its view on the Japanese economy, saying it was recovering. Its assessment on financial conditions stayed unchanged from last month. The recovery in China's economy gained new impetus on Wednesday as the trade balance improved sharply in September. In September, New Zealand's housing sector improved to its best position in a year and the central bank said it would end some emergency support measures amid a recovering economy. Yesterday, Intel Corp reported higher than expected third quarter results and issued an upbeat outlook for the current quarter. ASML; Europe's largest maker of semiconductor equipment, reported its first profit after three consecutive quarters of losses as demand for the chip industry improved. Crude oil extends its rebound, rising above $72 a barrel ahead of the weekly inventory data from the American Petroleum Institute. Gold prices reached a fresh alltime high Today, the calendar contains the UK jobless claims, euro zone industrial production and US retail sales. JPMorganChase will announce third quarter results EUR/USD On Tuesday, the dollar continued to cede ground against most majors. The context was not really dollar unfriendly as the German ZEW confidence came out weaker than expected. Stocks showed a moderate correction too, but this was also not enough for a sustained USD rebound. Technical factors (EUR/USD buying interest from Asian central banks) were said to be behind the move. So, EUR/USD initially hovered in the 1.4750 area, but going into the US trading hours a new wave of dollar selling kicked in. The dollar was also loosing ground against the battered sterling. This illustrates the underlying weakness of the US currency. A poor start of the US stock markets caused a temporary EUR/USD correction to the 1.4800 area, but the pair still closed the session with a decent gain at 1.4853 compared to 1.4773 on Monday evening. During the day, there were some news headlines on the screens that China and Russia would look to expand the use of their national currencies in bilateral trade. This was not really a market mover, but is another small sign of the erosion of the dollar's status a reference currency. After the close of the European markets, Fed's Kohn in a speech sounded rather dovish. His remarks left hardly any trace on the USD charts. However, they confirm that dollar won't receive any support from a change in the Fed policy anytime soon. After the closing of the market, Intel came out with better than expected earnings and a positive outlook. This is supporting risktaking in Asia this morning and EUR/USD is once again joining this move, with the pair trading in the 1.4880 area at the moment of writing EUR/USD: heading to the 1.50 mark Support comes in at 1.4839 (Reaction low hourly), at 1.4802/97 (STMA/Daily envelope), at 1.4762/40 Reaction low/Break-up hourly), at 1.4699/93 (Boll Midline/MTMA). Resistance stands at 1.4890 (Reaction high), at 1.4911/18 (Target Channel break/Daily envelope), at 1.4931/84 (1st/2nd Irr B), at 1.5008/21 (Envelope monlty/2nd target double bottom). The pair is in overbought territory USD/JPY Today, the calendar is fairly interesting. The European industrial production data might cause some headlines on the screens but are not important for the currency market. Later in the session, the US retail sales have more market moving potential. The consensus expects a monthly decline of -2.1%, due to autos. After the close of the European markets, the Fed minutes deserve some attention, too. Recently, some Fed members started to talk on the exit of QE. It will be interesting to see whether this debate was already a real issue at the previous Fed meeting. Of course, the key focus of al markets will again be on the stock markets and the corporate earnings. Better than expected results of Intel in the US and of ASML in Europe suggest a positive start of the stock markets in Europe this morning. Later today global markets will keep a close eye at the results of JP Morgan. At least for now, the global context is looking EUR/USD supportive. Global context: recently, the swings in risk appetite/risk aversion were the evident 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 don't see many reasons to turn dollar positive before it becomes clear that the Fed will start tightening monetary policy. We don't expect a turnaround in policy anytime soon. Any correction on the stock markets might still have some impact on EUR/USD. In this respect, the earnings season is coming in full swing this week and as the US indices are near the cycle top and close to key resistance, it may be a break or make week for equities this week. The first corporate earnings are encouraging and this continues to put a strong floor for EUR/USD trading, too. Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 improved the picture. The pair extensively tested the key 1.4719 December high and even set a new minor high (1.4844). At first there was no follow-through action on this 'break' yet. The subsequent correction narrowly missed the 1.4438/50 break-up area, put forward as offering a good opportunity to step in again and the pair resumed its gradual uptrend. The move was/is not really that spectacular, but it looks that the break above 1.4719 has been confirmed. So, if stocks would build on the current positive momentum, the 1.5021 target (2nd target double bottom of 1.3739) will soon come in the picture. The trend is your friend and the EUR/USD trend is obviously to the upside. On Tuesday, USD/JPY was locked in a rather narrow intraday trading range roughly between 90.20 and 89.45. However, in line with trading on most other major cross rates the bias was USD-negative, too. USD/JPY closed the session at 89.71 compared to 89.82 on Monday evening. This morning, the BOJ as expected left its policy rate unchanged at 0.1%. The bank did upgrade its view on the economy. On the other hand, they didn't give any indication on the fate of its temporary steps to facilitate corporate finance. Probably, even more interesting from a currency point of view: Japanese Deputy Finance Minister Minezaki said in an interview that Japan should not conduct intervention as soon as the yen rises. Rapid swings in foreign exchange are still seen undesirable. However, the Deputy Minister considered the current move as dollar weakness and rather than yen's strength and he expected this dollar weakness to persist. We don't understand the tactics behind this kind of yen-supportive talk (Would it be better to keep silent even if one implicitly agrees with the current move?). Whatever the tactical approach, the yen got another short in the arm this morning and USD/JPY dropped to the 89.00 area. Asian stock markets mostly are in positive territory (Japan is the exception to this rule). However, this has no big impact on the USD/JPY downtrend. 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 had 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. We looked to sell USD/JPY in case of a more pronounced up-tick hopeful in the 92/93 area. However, the price action over the last 24 hours suggests that this area will be difficult to reach. The 90.50 area already looks like a hard nut to crack. The 87.10 (year low) area remains the next high profile target on the downside for this pair. USD/JPY: yen regains traction Support is seen at 88.65/42 (Reaction low/break-up hourly), at 88.17/10/05 (Weekly envelope/ Boll Bottom/ Last week low) and at 87.10 (Year low). Resistance comes in at 89.57 (breakdown hourly), at 90.02 (Bollinger midline), at 90.47/55 (30 Sep high/Daily +weekly envelope) at 90.90 (LTMA). The pair is in neutral territory. EURGBP On Tuesday, it looked at first that the sterling sell-off would continue at the same speed as was the case over the previous days. Better than expected BRC retail sales and a second consecutive positive reading of the RICS house price balance were no help for sterling. The same was true for the UK CPI. UK consumer prices rose only 1.1% Y/Y from 1.6% Y/Y in August. The lower than expected inflation reading reinforced the market feeling that the BoE has every reason to maintain a stimulating monetary policy for a prolonged period of time. EUR/GBP tested twice the 0.9400 area, but a sustained break didn't occur. Later in the session, BoE's Bean gave a speech the implications of quantitative easing. The speech was mostly educational in nature and we didn't read any market sensitive info in it. At that time, the euro lost temporary some ground across the board and this time EUR/GBP joined this global intraday correction. Yesterday, there was a slight underperformance of ST UK government bonds vis-à-vis their European counterparts. However, this was a reversal of Monday's outperformance. So, we don't see this as strong signal for trading sterling yet. So, it looks that the sterling storm is calming a bit. EUR/GBP closed the session at 0.9331, even slightly lower compared to the 0.9351 close on Monday. Today, the UK labour market data are on the agenda. The market expects a rise in the jobless claims by 24.5 K in September. The jobless rate is expected to go up from 5.0% to 5.1% .We have the impression that better/less negative eco data have to potential to trigger a ST sterling positive correction. The positive sentiment to risk might also (at least temporary) ease the pressure on sterling. 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 quite 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 for a correction to go add/reinstall EUR/GBP long positions. We hold on to the view. The 0.9160 reaction low is the first important support level on the charts. The 0.9080 area remains the key point of reference. EUR/GBP: sterling to enter calmer waters? Support comes 0.9314 (Reaction low), at 0.9304/99 (daily envelope/ break-up), at 0.9269/41 (Reaction low/weekly envelope), at 0.9223 (MTMA), at 0.9160 (reaction low). Resistance is seen at 0.9353 (Breakdown), at 0.9386/99 (Boll top/daily envelop), at 0.9413/17 (Reaction high/27 March high), at 0.9373 (76 % retracement) and at 0.9490/20 (March/Febr. high). The pair is in overbought conditions. News EMU: ZEW disappoints again in October In October, the German ZEW indicator showed its first decline in one year. The headline index dropped from 57.7 to 56.0, while the consensus was looking for a slight increase (to 58.8). The current situation, on the contrary, rose from -74.0 to - 72.2, the fifth consecutive improvement, but the increase was somewhat smaller than expected. After the impressive rally, the ZEW disappointed in the last two months, but we wouldn't take it too serious and wait for the more reliable IFO and PMI's to take a conclusion. Other: UK inflation drops more than expected in September In the UK, CPI inflation stayed flat on a monthly basis in September. The yearly figure dropped from 1.6% Y/Y to 1.1% Y/Y, while the consensus was looking for an outcome of 1.3% Y/Y. Looking at the details, food & non alcohol dropped by 0.9% M/M, transport by 1.5% M/M and communication by 0.3% M/M. Prices of clothing & footwear (3.6% M/M), education (1.8% M/M), and household (1.6% M/M) rose significantly. Core CPI came out in line with expectations falling from 1.8% Y/Y to 1.7% Y/Y. From next month onwards, however, base effects from crude oil are likely to see yearly inflation figure creep up again. 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.