US Dollar Trading Marginally Lower Ahead Of Key Data

Daily Forex Fundamentals | Written by KBC Bank | Oct 01 09 07:42 GMT |

Sunrise Market Commentary EMU curve flattens after 1-year ECB tender shows demand for liquidity is waning The ECB tender attracts less than expected demand for liquidity, which pushes the money market rates slightly higher further out the money market curve. Weak US eco data cannot push bonds through resistance, but the alert is still on. Today, interesting market calendar, but the shadow of the payrolls report may prevent big moves. FX: US dollar trading marginally lower ahead of key data Yesterday, the price action in USD/JPY and EUR/USD was capped in tight ranges, driven by technical trading. Orderdriven activity pushed sterling temporarily higher, but also these gains could not be sustained. Today might bring more wait-and-see behaviour ahead of tomorrow's payrolls The Sunrise Headlines US equities closed lower, but well off intra-day lows (S&P -0.33%), as industrial stocks fell on a disappointing Chicago PMI survey. Asian equities trade mixed this morning, as the Nikkei (-1.53%) cannot benefit from the improvement in the Tankan. The Japanese Tankan report showed that business confidence extended its rebound in the third quarter, but capital spending plans fell further to previous cycle lows. The manufacturing PMIs in Australia and China extended their rebound above the 50 level to respectively 52.0 (vs. 51.7) and 54.3 (vs. 54.0), while in South-Korea the PMI fell slightly from 53.6 to 52.7. IMF raises its growth forecasts for 2010 from 2.5% to 3.1%, as Asia leads recovery. The International Finance Corporation - the World Bank's private sector arm - plans to raise $4B to buy distressed assets from banks in emerging and developing markets. Two US funds raise capital to buy toxic assets with the help of the Fed, the first operations in the PPIP program. Commodities rebounded sharply, as oil surged after news of an unexpected drop in petrol supplies. France forecasts its budget gap to widen to 8.2% of GDP in 2009 up from 3.4% last year and to rise further to 8.5% in 2010. A budget deficit of 5% is still expected in 2013, which means that its debt to GDP ratio will rise from 77.1% this year to 91% in 2013. Today, the focus is on the manufacturing surveys and the weekly claims ahead of tomorrow's US Payrolls report EUR/USD On Wednesday, EUR/USD had a choppy trading session but at the end the changes were very limited. EUR/USD was well bid early in the session. Surprisingly, it was the eco news flow rather than the stock market performance that drove the price action. Better than expected German labour market data and, even more, low demand for liquidity in the ECB 12 month tender drove EUR/USD to intraday highs in the 1.4675 area. The move was reversed soon, but it indicates that the currency market keep an eye on the global monetary context which is the key driver for trading. A slightly disappointing ADP labour market report and an unexpected decline of the Chicago PMI triggered a profit taking move on the equity markets and this caused a moderate correction in EUR/USD too, with the pair temporary dipping below the 1.46 mark. However, once again there was no follow-through price action (both in stocks and in EUR/USD). EUR/USD closed the session at 1.4640, compared to 1.4587 on Tuesday evening EUR/USD: indecisive trading pattern. Support comes in at 1.46118 (Boll Midline), at 1.4565/48 (Reaction low hourly/daily envelope), at 1.4526/02 (Week low/Reaction low), at 1.4438/37 (MT break-up/Daily uptrend line). Resistance stands at 1.4675/80 (Reaction high/Broken MTMA + daily envelope + Reaction high), 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 is in neutral territory. USD/JPY Today, the eco calendar is well filled. In Europe, the final September PMI and the August unemployment figures are released, but probably not too important for the market. In the US the calendar is more inspiring with the personal income and spending data, the jobless claims, the ISM manufacturing and a few other less important data. Regarding the data, we take a close look at the ISM and at the weekly jobless claims. Recently, many economic data showed tentative signs that the pace of the economic rebound slowed in August/September. If this pattern would be confirmed, the consolidation/moderate correction on the stock markets and on EUR/USD might still go a bit further. However, tomorrow's payrolls report will be key in this debate. From next week, stock markets will gradually turn their focus to the upcoming earnings' season. 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. Nevertheless, the difference in the amount of asset purchases by the Fed (+ 1 trillion) compared to the amount of asset purchased by the ECB (15 mld of covered bond) is a good illustration of the relative unwinding risks associated with the policy in both areas. 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 not there yet, but it is still feasible. As soon as stocks resume their uptrend, the 1.5021 target (2nd target double bottom of 1.3739) might come in the picture. On Wednesday, the yen strengthened against the dollar early in Asian trading, probably supported by end of quarter hedging activity. Later in the session, USD/JPY settled in a tight sideways trading pattern roughly between 89.40 and 89.85. Trading was mainly technical in nature and the US data had no lasting impact on the price action. USD/JPY closed the session at 89.70, compared to 90.09 on Tuesday. In a broader perspective, recent warnings of the Japanese Finance Minister have eased the pressure on the yen. Nevertheless, the 'problem' is far from solved with USD/JPY still struggling to regain the 90.00 mark. This morning, all eyes were on the Tankan Business confidence report. The headline large manufacturing index rebounded from -48 to -33 (line with the market consensus). Most other sub-indices showed an improved, too. On the other hand, Japanese companies continue to cut capital spending plans. The market reaction to report was rather limed. The Nikkei lost 1.53 %. USD/JPY is marginally higher compared to yesterday's closing levels. In an interview, Japanese Fin Min Fuji said that he didn't intend to put the yen's recent rise on the agenda of this week's G7 meeting in Istanbul. We don't make too much out of this but it suggests that the current levels of yen strength are not yet considered exceptionally enough to warrant high profile action (interventions). 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 has now even reversed. The dollar (and not the yen) gradually has 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 (the 91.73/90.00 area was a high profile support level). On top of that, the change in talk from the Japanese authorities also caused profit taking on yen long positions short-term. 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 start of a new quarter often sparks speculation of Japanese investment flows abroad. If so, this might temporary support USD/JPY. The 87.10 (year low) area remains the next high profile target on the downside for this pair USD/JPY: struggling to regain the 90 mark Support is seen at 89.35 (Reaction low), at 89.15/11 (Reaction low/Boll bottom), at 88.96 (Daily envelope), at 88.23/00 (Reaction low/Weekly envelope) and at 87.10 (Year low). Resistance comes in at 90.42 (ST high), at 90.70/76 (MTMA/Weekly STMA), 91.13/22 (Boll midline/ LTMA) and at 91.87 (38% retracement). The pair is in neutral conditions EUR/GBP On Wednesday, EUR/GBP was heavily sold at the start of the European session on market chatter of a big EUR/GBP selling order. EUR/GBP nosedived from the 0.9140 area to reach intraday lows in the 0.9080/85 area. However, later in the session, the storm calmed down. In technical trading, the pair even regained the earlier loses and closed the session at 0.9159, still rather close to the 0.9139 close on Tuesday evening. There were no important UK eco data. In Speech, BoE Miles said the BoE asset purchases are having an impact on the economy. He was also very relaxed on the reversibility of the QE. Today, the manufacturing PMI will be published. The figure is expected the return just above the 50-mark. The BoE releases its quarterly credit conditions survey. 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 as a key technical level had been reached (0.9082). There is still no good reason to row against this sterling negative tide. 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 (eg. towards the 0.9082/0.9000 area) before adding to EUR/GBP long exposure. (The 0.9082 was tested yesterday). EUR/GBP: sterling enters calmer waters Support comes 0.9132/22 (Reaction low/Break-up), at 0.9089 (Daily envelope), at 0.9078/70 (Reaction low /MTMA), at 0.9061 (Break-up daily), at 0.9040 (Break-up) and at 0.9010 (Break-up). Resistance is seen at 0.9175/84 (Broken STMA/ Breakdown), at 0.9210/17 (Reaction high/62% Retracement), at 0.9256 (Reaction high), at 0.9296/0.9304 (Boll Top/Reaction high). The pair is unwinding overbought conditions. News US: ADP employment report disappoints The ADP employment report showed that private firms shed a net 254 000 jobs in September, following a decline by 277 000 jobs (earlier reported at 298 000). The market was slightly more optimistic, counting on a 200 000 decline (Bloomberg) or 240 000 decline (Dow Jones). This means that the market should already count on a weaker payrolls number than the consensus of -180 000. Although slightly disappointing, the September loss is the smallest since July 2008. Job losses in the service sector amounted to 103 000, while 74 000 factory jobs were lost. The Chicago PMI disappointed profoundly, as its headline index declined unexpectedly to 46.1 from 50 previously. This suggests that the activity is again shrinking in the manufacturing sector in the Chicago area. It follows a number of other surveys like the Richmond and Philly Fed surveys that showed a decent headline figure but contained signs of underlying weakness. The details fully confirm the headline with new orders, order backlogs and production substantially lower. This is a bit disconcerting for those like us who count on a strong first phase of the recovery. While the Chicago PMI is quite volatile and sometimes unreliable as predictor of the ISM, recent evidence put the risks for the ISM for a decline from the 52.9 reading of August instead of a rise to 54 as suggested by the consensus estimate. EMU: German unemployment continues to surprise EMU inflation dropped in September to -0.3% Y/Y from -0.2% Y/Y previously, according to the flash estimate. The outcome was below the consensus estimate for stabilization at -0.2% Y/Y. However, the outcome wasn't unexpected anymore after the releases of the German, Belgian and Spanish reports. A similar message came from the Italian HICP, released today. Inflation rose by 0.6% M/M and 0.3% Y/Y, falling short of expectations for a 0.7% M/M and 0.4% Y/Y increase. For details of the EMU HICP we have to wait for the final report. German unemployment continued to surprise in September, as the state agency reported a 12 000 decline in September, following decreases by 5 000 and 7 000 in the previous months. The unemployment rate dropped to 8.2% from 8.3% previously and is barely up from the 7.6% low of the cycle. Have the labour market laws been repealed? Normally unemployment continues to rise well into the cycle, while the latter is now still in the bottoming out phase. The reason seems to be that firms used the subsidized system of short shift workers to avoid lay-offs. The figure for short shift workers lags the unemployment figures by three months. While in June the number of short shift workers dropped, it was the first monthly decline but at 1 433 000, the figure is still up almost 1 400 000 since October 2008. The number of vacancies has gradually decline from a peak of 665 000 in January 2007 to 468 000 currently, but in recent months the decline slowed sharply and the level is still close to the 2000 peak. Also the decline of employment slowed in recent months, notably to 4 000 in August, from 15 000 in July and 36 000 in June. 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.