Currencies: Sterling Heavily Sold After A Dark CEBR Report On The UK Economy

Daily Forex Fundamentals | Written by KBC Bank | Oct 12 09 07:49 GMT |

Sunrise Market Commentary Global bonds sell off, as bond investors are spooked by a 'hawkish' speech of Bernanke On Friday, the downward correction that started after Thursday's US 30-year bond auction accelerated following news reports about a 'hawkish' speech of Bernanke and tests of reverse repos in the US spooked the market. Today, trading may be more quiet, as Japanese and US markets are closed and the calendar is devoid of market moving data. Sterling heavily sold after a dark CEBR report on the UK economy The dollar made a rebound on Friday which continues today. Comments on the exit strategy by Bernanke might have played a role, but probably was no more than a trigger for an overdue correction. Sterling is in the limelight though as it is under heavy selling pressure following a very black CEBR report on the UK. The Sunrise Headlines On Friday, US Equities ignored Bernanke's comments and extended their impressive rally supported by a first batch of positive corporate earnings reports. Dow/S&P rose by 0.80% / 0.56%. This morning, most Asian shares start the week in positive territory after Singapore raised its 2009 economic forecasts. St Louis Fed President Bullard said on Sunday that it was hardly to accurately measure the gap between what the economy is producing and its full potential and added that any medium-term inflation threat is negligible even in the face of extraordinarily accommodative monetary policy. Royal Philips Electronics NV, Europe's biggest consumer-electronics producer, unexpectedly posted a profit in the third quarter. Third-quarter net income totaled 174 million euro, while analysts had predicted a loss of 44.7 million. British interest rates will stay at 0.5% until 2011 and will not rise to 2% until 2014, the Centre of Economics and Business Research reported this morning. South Korea's persistent house price rise is a top concern for the government, but it realizes that the recent spate of lending controls to calm the market could cause wider problems, according to senior officials. On Friday, crude oil ($72.47) climbed to its highest level in three weeks after the International Energy Agency increased its global consumption forecast for a third month. Today, US and Japanese markets are closed. EUR/USD On Friday, the US dollar made a limited come-back against the euro. We think that technical reasons were the main driver behind the dollar rebound, but cannot exclude that the comments of Bernanke on the exit strategy, or at least the interpretation the news agencies gave to it (see bond piece) played some role too. EUR/USD dropped from about 1.48 in the opening to 1.47 during Asian trading. In the European morning session, the pair first stabilized, maybe due to very strong French and Italian production data, in a tight 1.4720-40 range before moving again higher to 1.4775 in the run-up to the US session. Later in that session, the downside was retested, but followed by a recovery that left EUR/USD at 1.4732 in the close, down about 60 ticks from the 1.4794 close on Thursday. The US trade deficit came out somewhat lower than expected, due to a surprise drop in oil imports, not a very sustainable factor, and therefore it couldn't help the dollar in a sustainable way. So, we think that chart-technical factors and the oversold character of the dollar explains its rebound. The trade weighted dollar had re-tested the recent lows on Thursday, but couldn't break it, setting the stage for a dollar rebound. A similar picture was visible in EUR/USD (1.4844 resistance) and other crosses. Overnight and today. Traders pushed EUR/USD down towards Friday's lows, but the attempt failed and the pair trades again close to the opening levels. The US markets are closed for Columbus Day and the calendar is empty. That leaves traders with little guidance for the day. In thin trading, we might see the theme of a possible earlier-than-expected tightening of US monetary policy keeping traders busy and convincing some to trim dollar short positions. So the correction of the dollar may continue today, but without much momentum or without deeper longer-term significance. EUR/USD: ST highs near, but scope for some corrective action? Support comes in at 1.4690 (break-up hourly), at 1.4682 (Bollinger midline/ MTMA), at 1.4582 (last week low) and 1.4553 (Bollinger bottom) and at 1.4517 (uptrendline). Resistance stands at 1.4743 (today high), at 1.4812/18 (Bollinger top/Thursday spike), 1.4845 (Reaction high), at 1.4867 (Sep 2008 high). The pair is in overbought territory USD/JPY Global context: recently, the swings in risk appetite/risk aversion were the obvious 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 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 the Bernanke comments point to a turnaround in policy in the near and not so near future. 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 break of make week for equities this week. 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). However, there was no followthrough action on this 'break' yet. Following a correction, that narrowly missed the 1.4438/50 break-up area, put forward as offering a good opportunity to step in again, the pair closed again in on the 1.4844 resistance last week, but again the move missed momentum. If the stock market would take out key resistance, the 1.5021 target (2nd target double bottom of 1.3739) might come again in the picture and the technical picture would get yet another EUR bullish upgrade. If equities fail to break higher this week and fall a prey to profit taking, EUR/USD may again slid lower in the range with 1.4438/50 still major support. On Friday, USD/JPY rebounded sharply and closed the session at 89.78, up from Thursday's close at 88.39. The move started in early Asian trade and continued until the closure in New York, interrupted only once. Overnight the up-move of the pair continued and it changes hands now at 90.24. The Japanese (and US) markets are closed and therefore, trading is thin. We would qualify the recent moves corrective in nature. We are aware that an eventual change towards a tighter monetary policy would be a major positive for the dollar generating a huge re-positioning in favour of the dollar. It would end all talk about the use of the dollar as a carry funding currency. However, that looks premature to us. Therefore, as we were waiting on a correction to install new yen longs, we would indeed act if the correction brings the pair again in the 92/93 area. 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 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: Correction time Support is seen at 88.90 (break-up hourly), at 88.23/15/01 (reaction low/Bollinger bottom/week low), and at 87.10 (Year low). Resistance comes in at 90.19/28 (Bollinger mid-line/today high), at 90.42 (30 Sep high) and 92.14 (Bollinger top) . The pair is in oversold conditions EURGBP On Friday, the sterling sell-off resumed with quite some vengeance. Sentiment remains very bearish as more and more people are convinced that the UK needs a weaker currency to rebalance its unbalanced economy. Especially, the huge fiscal deficit and the need to take draconic measures to turn it around sent shivers through the market, as it also suggests that the BoE will be one of the last if not the last Central bank to leave its ultra-loose monetary policy stance. The speech of the shadow chancellor at the party Congress of the Conservatives was very clear on the subject as were projections of IFS. Overnight, the CEBR said that it expects British interest rates to stay at 0.5% until 2011 and will not rise to 2% until 2014. The consultancy added that sterling could fall to below parity versus the euro and to 1.40 versus the dollar. Following the publication, sterling selling flared up driving it to EUR/GBP 0.9302, a new high (previously 0.93004). So, an important technical test is ongoing. Today, the calendars are empty on both sides of the pond. So the technicals will be in the driving seat. Tentatively, we would think that this plays in favour of sterling and prevent a break higher today. However, the longer term outlook remains clearly sterling negative. 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: test highs following CEBR report Support comes 0.9252 (STMA), at 0.9182 (Friday's low), at 0.9197 (MTMA) and at 0.9140 (week low). Resistance is seen at 0.9315 (today's high), at 0.9353 (Bollinger top), at 0.9417 (March high). The pair is in overbought conditions. News US: Trade deficit narrows The trade deficit unexpectedly narrowed in August to $30.7 B from $31.9 B previously. However, it was only a partial reversal from the widening of previous months. The 3-month average widened still slightly to $30B from $28.5 B. Exports rose by a meagre 0.2%, but imports dropped 0.6% M/M. The decline in imports was due to crude and aircraft, while cars rose still strongly (effect cash for clunkers). We wouldn't draw many conclusions from this report. EMU: Italian and French production surge French industrial production rose a much faster-than-expected 1.9% M/M in August, following an upwardly revised 0.3% M/M in July, earlier reported at 0.1% M/M. It was the fourth consecutive monthly rise that suggests that activity in the industrial sector is reviving. Production stands so far 3.4% above Q2 average pointing to a strong Q3 GDP growth, well above the current BdF estimate of 0.3% Q/Q. Italian production showed a similar upbeat picture, as output rose by 7% M/M in August after increasing 2.4% M/M in July. This brings the Q3 average so far 5.9% above Q2, virtually securing that Italy will report growth in Q3, which would be the first quarterly gain since Q1 of 2008 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.