Currencies: Dollar Stays Under Fire

Daily Forex Fundamentals | Written by KBC Bank | Oct 07 09 07:44 GMT |

Sunrise Market Commentary Global bonds lose moderate ground, as equities and commodities storm ahead Bonds continued their consolidation following last week's important technical break higher, amid increased risk appetite across various 'risky' asset classes. Supply weighed, even if the US 3-year T-Note auction went well. Today, equities might consolidate, following stellar gains and the ahead of the earnings season (Alcoa), but more supply should prevent bonds from making much headway. FX: Dollar stays under fire On Tuesday, several factors (RBA rate hike, higher equities and a press article on the potential replacement of the dollar as currency for oil transactions) conspired against the dollar. EUR/USD is coming close to the recent highs. Sterling was hammered by an awful UK industrial production report The Sunrise Headlines US equities stage a broad rally ahead of the start of Q3 earnings season this evening (S&P +1.37%). Asian equities track US equities higher this morning. The energy and materials sector led the surge in stocks after commodities rallied higher. Gold set a new record high at 1043 USD/ounce. Banco Santander raised just over $8B from the listing of its Brazilian subsidiary in the largest IPO of this year, while ING sells its Swiss private banking assets to Swiss wealth manager Julius Bear for $500M. Fed's Hoenig warns that the Fed will need to remove its very accommodative policy sooner rather than later, as a rate of 1 or 2 percent is not tight, but still very accommodative. ECB's Quaden echoes comments of Trichet on the euro/dollar exchange rate, as he says that 'for the reduction of external financial imbalances of the US, the problem is not the exchange rate of the dollar vis-à-vis the euro, the problem is elsewhere'. UK consumer confidence rose to the highest since April 2008, according to Nationwide Building Society. Today, the calendar remains thin with the German factory orders, a German 30- year Bund auction and a US 10-year Note Auction as meager eye-catchers EUR/USD On Tuesday, a series of factors again conspired against the USD dollar. The rate hike of the Australian central bank supported risk taking on all markets, including the currency market. This 'automatically' implied additional dollar selling. The Independent article saying that several countries were holding secret talks to end the role of the dollar in oil trading and switch to a basket of currencies, put the dollar under additional pressure, even as several parties reportedly involved denied it. So, EUR/USD was already changing hands well above the 1.47 mark at the open of the European markets. In Europe and the US only some second tier eco data were on the agenda. However, a new up-leg on the stock markets and the commodity markets kept EUR/USD well supported and the pair reached an intraday high in the 1.4760 area when European traders were leaving their desks. The broad decline of the dollar also caused gold to reach new all time highs. US equities returned some of the early gains later in the session and this caused EUR/USD to come off the intraday. The US 3-year auction went well and had once again no lasting impact on EUR/USD trading. The pair closed the session at 1.4722, compared to 1.4648 on Monday evening EUR/USD: ST highs coming within reach Support comes in at 1.4669/55 (Break-up/Boll Midline +daily envelope), at 1.4633 (STMA), at 1.4582 (week low) and 1.4519/05 (LTMA/Bollinger bottom). Resistance stands at 1.4766 (Breakdown hourly/weekly envelop), at 1.4784/88 (Daily envelope/Bollinger top), 1.4803 (Reaction high hourly), at 1.4845/67 (Reaction high/Sep 2008 high). The pair is in neutral territory. USD/JPY Today, the eco calendar is again rather thin. In Europe, the German factory orders are on the agenda. The series is interesting, but will only have a limited impact on currency trading. In the US only some second tier eco data are on the agenda. Later in the session markets will also keep and eye on the 10-year Note auction in the US, which may go a bit less well than yesterday's (reasonably successful) 3-year auction. However, it is unlikely to have an immediate negative impact on the dollar. Markets will also look forward to the start of the earnings season with Alcoa reporting results after the bell in the US. The liquidity-driven rally on the stock markets is well in place with the question now whether earnings will live up to the recent re-pricing on the stock markets. Global context: recently, the swings in risk appetite/risk aversion were the obvious drivers on the currency markets. In this context, improving investor sentiment toward 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 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. Last week's US payrolls report only reinforced the feeling that point hadn't been reached. Any correction on the stock markets might still have some impact EUR/USD. However, as we expect corrections on the liquidity driven rally on the stock markets to be limited, the downside in EUR/USD well protected. On the contrary, yesterday's price action suggests that that the pair might again go for a test of the recent highs. Fro the euro side of the story, we keep a close eye on this week's ECB meeting. The ECB may feel the need to come out ever more forceful against euro strength. The ECB press conference might offer Trichet the opportunity to make his point. When asked whether the current EUR/USD exchange rate was a concern ECB's Quaden yesterday repeated the new ECB mantra that the problem (with respect to global imbalances) is not the exchange rate of the euro against the dollar, but that the problem is elsewhere. 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. However, there was no follow-through action on this 'break'. Longer term, we maintain a buy-on-dips approach. However, the ST picture for EUR/USD remains indecisive. Recently, we indicated that the 1.4438/50 break-up area would offer a good opportunity to step in again. We came rather close to this area at the end of last week, but a real test didn't occur. The risk is that this level won't be reached. So, we would not wait too long to cover USD long exposure. IF the stock market rebound continues, the 1.5021 target (2nd target double bottom of 1.3739) might come again in the picture On Tuesday, USD/JPY joined the global dollar decline. The drivers were not different from those that guided the price action of other USD cross rates The strong open on the US stock markets hammered the pair to new intraday lows in the 88.65 area. The pair closed the session at 88.82, compared to 89.53 on Monday evening. This morning, the Japanese leading indicator was in line with expectations improving from 82.5 to 83.3 in August. Asian stock markets joined the rally in the US yesterday and show gains on average of around 1%. USD/JPY is holding close to the recent lows. In an interview, the Japanese finance minster indicated that the current situation of the yen is not extremely abnormal. He reaffirmed his stance that governments should not intervene in the currency markets in an excessive way. However, he also said that 'if forex market movements are outrageously reckless, or acting without any order, then some measures are needed'. So, a (very) gradual rise of the yen is probably acceptable, if it goes too quickly, interventions remain likely. Global context: USD/JPY reached a reaction high in the 97.80 area early August. Despite a 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 still look to sell USD/JPY in case of a more pronounced up-tick. The 87.10 (year low) area remains the next high profile target on the downside for this pair. Even as we have a longterm yen positive bias, we would not go yen long at the current levels as Japanese authorities will most probably continue to use verbal interventions to prevent a to swift rise of their currency. The 92/93 area might be a good entry point if the correction would go that far USD/JPY: Downtrend well in place, but markets are cautious as officials might try to slow the yen strengthening Support is seen at 88.62/58 (Week low/Bollinger bottom), at 88.34/23 (weekly Bollinger bottom/28 Sep low), at 88.04 (weekly envelop) and at 87.35/10 (Starc bottom/Year low). Resistance comes in at 89.27/32 (STMA/Daily envelope), at 89.98 /10 (Week high/MTMA), at 90.42/46 (30Sep high/Bollinger mid-line). The pair is in neutral conditions. EUR/GBP On Tuesday, sterling showed again quite some wild swings. Early in European trading sterling seemed able to regain some ground. A global positive environment to risk and a better than expected Halifax house prices report caused some downsizing of sterling short positions. However, the publication of the UK August industrial production data was a real shocker for markets. Production in August declined by 2.3% M/M and by 11.2% Y/Y, far worse than market expectations. EUR/GBP in two waves rose to the 0.9270 area, but the reaction high at 0.9304 was not challenged. The NIESR GDP estimate (0.0%) for September was no big help for sterling either. The pair closed the session slightly of the highs at 0.9248, compared to 0.9193 on Monday This morning, the Nationwide consumer confidence index for September came out better than expected at 71, up from 65. However, at least for now the release is failing to give the sterling any support worth mentioning. Later today, the UK calendar is empty. Markets will look forward to tomorrow's BOE policy meeting. However, we expect to Bank to maintain its wait-and-see mode until the November meeting (when a new inflation report will be available). 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. Last week, there was a temporary unwinding of overextended sterling short positions. Recently, we were looking for a correction to go add/reinstall EUR/GBP long positions. The 0.9080 area (previous high) has already been tested twice. So, its might become a hard nut to crack. A break above the 0.93-area could reinforce the EUR/GBP ascent EUR/GBP: sterling hammered (again) by poor UK production data Support comes 0.9237 (Reaction low hourly), at 0.9213/01 (Daily envelope/break-up hourly), at 0.9188 (STMA), at 0.9144/40 (MTMA/week low) and at 0.9113 (Weekly envelop). Resistance is seen at 0.9274 (Reaction high), at 0.9296/0.9304 (Daily envelope/ Reaction high), at 0.9318 (Weekly envelop), at 0.9350 (Daily Boll top). . The pair is moving into overbought conditions News Other: UK industrial production disappoints In the UK, industrial production unexpectedly fell by 2.5% M/M in August, as output in the manufacturing sector declined by 1.9% M/M, while mining and quarrying dropped by 7.3% M/M. The figures dashed market expectations for a third consecutive monthly increase. The sharp decline puts downward risks to Q3 GDP growth, as on a three-month basis industrial production is now down by 0.2% 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.