Dollar Hardly Gains From Stock Market Correction

Daily Forex Fundamentals | Written by KBC Bank | Oct 02 09 07:57 GMT |

Sunrise Market Commentary Dash for Bonds Global bonds made juicy gains on high volume as risk aversion flared up. Key technical resistances were broken in both US and German market. At the same time, intra-EMU spreads versus Germany blew out. Today's US payrolls will be looked at in a tense market climate. FX: dollar hardly gains from stock market correction Yesterday, EUR/USD lost some ground in step with the correction on the stock market. However, the losses were fairly limited. The dollar even ceded ground against the yen. Today, there will be some market talk whether the G7 will address the issue of the currency markets, but as is the case of all other markets, the US payrolls are the key feature for currency trading today. The Sunrise Headlines Equities sold off yesterday, as investors took profit on the equity rally at the start of Q4 and ahead of today's US Payrolls report. Cyclical and financial equities bore the brunt. Asian equities track the sharp down-move this morning. Chinese property developer Glorious Property Holdings fell 20% in its debut in Hong Kong, signaling a waning appetite among investors for IPO's. US auto sales fell 23% in September after the end of the federal government's 'cash for clunkers' incentive program, with GM and Chrysler suffering the sharpest declines. Fed Lacker warns the Fed may need to raise interest rates before the unemployment rate starts falling. Ireland will hold a second referendum on the EU's new governing treaty today, as polls show 55% will back the treaty compared to 27% who oppose it. Greece will choose a new government on Sunday, as polls show the opposition socialist party leading by about 7 percentage points over the ruling centre-right government. Today, all eyes are focused on the US Payrolls report. EUR/USD On Thursday, EUR/USD drifted lower throughout most of the session. As usual the decline in EUR/USD more or less coincided with the forceful technical correction on the stock markets. However, considering the steep losses of equities, the correction of EUR/USD was after all fairly limited. There was not really a clear explanation for this EUR/USD resilience. Is it an indication that market talk on the US dollar as funding currency for carry trades had been a bit overdone? There was also some market talk on the upcoming G7 and how it would address the issue of the currency markets. Eurozone officials were said to have prepared a joined position on the currency issue that will be put on the table at this weekend's G7 meeting. Obviously there is quite some unease in Europe on the recent strengthening of the single currency. Mr. Trichet in a covert way warned that excessive volatility and disorderly movement in exchange rates had adverse implications for economic and financial stability. In the same context, US Treasury Secretary Geithner, who will also join the G7 meeting in Istanbul, reiterated the usual US mantra that a strong dollar is very important for the US. So, at first sight everyone agrees on a stronger dollar, but it is obvious that no one is able (Europe) or prepared (the US) to take any action to support their rhetoric. On top of that, after last week's G20, there is growing uncertainty whether the G7 is still the right forum to address currency matters. In this context, one should not be surprised this pre-G7 talk having little impact on currency trading. EUR/USD closed the session at 1.4545, compared to 1.4640 on Wednesday evening EUR/USD extends gradual correction Support comes in at 1.4502/97 (Reaction low/1st target H&S short term), at 1.4475/62 (LTMA/Daily uptrend line +daily envelope), 1.4438/18 (MT break-up/Boll bottom). Resistance stands at 1.4585/97 (Reaction high/Daily envelope), at 1.4662 (MTMA), at 1.4712/21 (Weekly Boll top/Reaction high), at 1.4766 (Breakdown hourly), at 1.4803 (Reaction high), at 1.4845 (Reaction high/Equality C-wave), at 1.4867 (2008 Sept high). The pair moving into oversold territory. USD/JPY Today, there is only one big issue for all markets: the US payrolls report. We don't have a strong view on the outcome of the payrolls. Nevertheless, we have the impression that any disappointment might be used as a good excuse for some additional profit taking on the stock markets. In theory this should also put the risks for EUR/USD to the downside. However, as indicated, we are not really impressed by yesterday's USD performance. So, it will be interesting to see how strong the US carry trade story (and thus also reversal of carry trades) still is for markets. By default we suppose that the trick is still working. Global context: recently, the swings in risk appetite/risk aversion were the obvious drivers on the currency markets. In this context, the decline of the dollar is considered as a signal of improving global investor sentiment. On top of that, in this low yield environment, the dollar has become the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs together with 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 Fed decision indicates that this point hasn't been reached. From time to time, some individual Fed members have given some warnings that the Fed might act sooner than usual, but for now those warnings are largely ignored in the FX markets. Any correction on the stock markets might also leave its traces on EUR/USD. However, as we expect these corrections on the liquidity driven rally on the stock markets to be limited, we also see the downside in EUR/USD well protected. Looking at the (technical) charts, EUR/USD cleared the range top at 1.4438/48, improving the picture for EUR/USD. Recently, 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're heading in the right direction. As soon as stocks resume their uptrend, the 1.5021 target (2nd target double bottom of 1.3739) might come in the picture. On Thursday, USD/JPY had a slightly downward bias. However, there was not really a big story to guide the price action. The poor performance of the US stock markets and some disappointing US data were seen a good reason to sell the dollar against the yen. After all, the move was limited and we would not draw firm conclusions whether it is the dollar or the yen that will be the preferred safe haven in case the correction on the stock markets would continue. Nevertheless, one can not ignore that the yen is holding up very well. USD/JPY closed session at 89.60, compared to 89.70 on Wednesday. This morning, Japanese eco data came out much better than expected but this didn't help to change the course of events on the stock markets. Asian/Japanese stock markets joined yesterday's correction of the US and European markets. Once again, this had installed a cautious yen positive bias in Asian trade this morning. 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. This was a sign of underlying dollar weakness. 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 caused profit taking on yen long positions shortterm. We still look to sell USD/JPY in case of a more pronounced up-tick. The 92/93 area might be a good entry point if the correction would go that far. The 87.10 (year low) area remains the next high profile target on the downside for this pair. Even as we have a long-term yen positive bias, we would not go yen long at the current levels as Japanese authorities will most probably continue to us verbal interventions to prevent a to swift rise of their currency. USD/JPY: the picture continues to look heavy Support is seen at 89.15/05 (Reaction low/daily envelope), at 89.96 (Boll bottom), at 88.23/00 (Reaction low/Weekly envelope) and at 87.27/10 (Broken channel top/Year low). Resistance comes in at 90.18/42 (Reaction highs), at 90.76/95 (Weekly STMA/Daily Boll midline), 91.59 (Reaction high) and at 91.96 (MT break down). The pair is in neutral conditions EUR/GBP On Wednesday, the technical rebound of sterling against the euro continued. There was not really hard evidence to support this move. On the contrary, the UK PMI from the manufacturing sector even came out below market expectations as it returned below the 50 mark. This only caused a temporary halt to the sterling rebound. Early in US trading the pair revisited the 0.9080 support area, but as was the case earlier this week, a break could not be forced. EUR/GBP closed the session at 0.9118, compared to 0.9159 on Wednesday. Overnight, Nationwide house prices rose 0.9% M/M in September (unchanged Y/Y). The release was slightly above consensus but until now the reaction on the currency market has been limited. Later today, the construction PMI and the BOE Q2 housing withdrawal are on the agenda. Those series are no market movers. We expect more technically inspired trading. Global context: Since mid June, the EUR/GBP cross rate entered a consolidation pattern. Sterling had come off from distressed levels at the end of last year. This move was supported by growing evidence that the decline in economic activity in the UK had moderated. However, lingering uncertainty on the BoE's quantitative monetary policy capped the rebound of sterling. 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. Over the previous days, there was some unwinding of overextended sterling short positions. We still wait/hope for the current correction to go somewhat further to 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. Nevertheless, we could feel more comfortable to go long again in case of return action to the 0.9000/0.8984 support area EUR/GBP: sterling enters calmer waters Support comes 0.9102 (Reaction low), at 0.9085/78 (MTMA/Reaction low), at 0.9061 (Break-up daily), at 0.9040 (Break-up) and at 0.9010 (Break-up) and at 0.8984 (23 Sept low). Resistance is seen at 0.9147 (STMA), at 0.9177/84 (Reaction high/ Breakdown), at 0.9210/17 (Reaction high/ 62% Retracement), at 0.9256 (Reaction high), at 0.9297/0.9304 (Boll Top/Reaction high). The pair is unwinding overbought conditions. News US: ISM stabilizes, while claims rise and pending home sales surge The ISM manufacturing survey showed a near stabilization in conditions in September, whereas consensus was looking for an improvement, which also occurred in the previous eight months. However, earlier released regional survey already pointed to a weaker result. The headline ISM index fell by 0.3-points to 52.6, still pointing to rising activity in the sector and in the overall economy. The details were still relatively bullish. Indeed, new orders fell 4 points but at 60.8 they remain strong and point to further recovery of activity in the next months. Also backlog of orders (53.5 versus 52.5), supplier deliveries (58 versus 57.1) and new export orders (55 versus 55.5) contain good news. The decline in production (55.7 versus 61.9) was slightly disappointing, but given an increase in orders the decline in production shouldn't go much further. Inventories jumped to 42.5 from 34.4, suggesting the inventory contraction continued to slow. The employment index more or less stabilized at 46.2, showing that firms are still shedding jobs. The prices paid index slipped to 63.5 from 65, but is clearly above the 50 barrier, suggesting a positive price trend. Households went on a spending spree in September. Indeed, Personal spending increased by a stronger-than-expected 1.3% M/M in August following an upwardly revised 0.3% M/M increase. This means that PCE will make a substantial +3% contribution to Q3 GDP. The outcome is well above expectations. Nevertheless, the sharp increase in spending was led by car sales, a result of the cash for clunkers program. As the program finished, car sales will fall sharply, as the surge in spending on cars borrowed from sales in the next months. Also higher gasoline prices played a role, but the 0.4% M/M increase in services is promising in a longer term perspective. So, there is no place for euphoria, but also no reason for pessimism. In the next months, we will see how the consumer will behave. The tepid 0.2% M/M rise in income in August following an identical rise in July highlights the constraints households face in their spending, but was nevertheless somewhat above consensus. . Pending Home sales rose for the seventh consecutive month in August up by 6.4% M/M and 12.4% Y/Y, following a 3.2% M/M in July, reaching their highest level since March 2007. The figures suggest that the unexpected decline in Existing home sales that occurred in August probably won't be repeated in September. Pending Home sales precede Existing Home sales, even if the correlation is not always respected in the month-to-month approach. Construction spending rose a biggerthan- expected 0.8% M/M in August, following a steep, downward revision to -1.1% M/M in July. Initial claims unexpectedly jumped 17 000 to 551 000 from an upwardly revised 534 000 (earlier 530 000). The 4-week average fell 6 250 to 548 000. The market was positioned for a near unchanged outcome. The trend is still downwardly oriented, but the pace of slowing is a bit disappointing. Continuing claims on the contrary fell 70 000 to 6 090 000, the lowest level since the peak EMU: PMI survey revised higher EMU PMI manufacturing index for September was revised 0.3 points higher to 49.3, which compares to the August value of 48.2, according to the final report. It was the highest reading since May 2008. However the result still suggests a declining activity in the sector, even if the decline is slowing. The details didn't change the message coming from the preliminary report. EMU unemployment rate climbed 0.1%-point to 9.6% as unemployment rose 165 000. The deterioration is broadly in line with the pace of deterioration in previous months 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.