Currencies: Dubai Driven Dollar Rebound Short-Lived

Daily Forex Fundamentals | Written by KBC Bank | Nov 30 09 08:40 GMT |

Sunrise Market Commentary Global bonds stabilize, as Dubai World induced risk aversion wanes Bonds opened sharply lower, but lost these gains later on as investors re-assessed the risks surrounded Dubai World and potential contagion. In the weekend, more support surfaced for Dubai leading to stronger trading Asian equities. However, we don't expect equities to rally fast higher, keeping the environment bond-friendly. FX Dubai driven dollar rebound short-lived At the end of last week, the dollar and the yen were the major beneficiaries of the Dubai jitters. However, as this theme islosing impact on markets, underlying dollar weakness might soon come to the forefront again. Sterling fails to recoup the post-Dubai losses against the euro The Sunrise Headlines On Friday, US Equities opened sharply lower, but regained some of its losses later in the session. Dow/S&P ended 1.72% / 1.48% lower led by financials. Asian stocks start the week with encouraging gains as the United Arab Emirates' pledge of support for banks eased concerns. US consumer spent significantly less per person at the start of the holiday season this weekend, dimming hopes for a retail comeback that would help propel the economy early in 2010. India's economy expanded at the fastest pace in six quarters as GDP grew 7.9% Y/Y in the third quarter, giving the central bank room to withdraw more stimulus measures. The head of the Bank of Japan Masaaki Shirakawa said the bank will act decisively in the event of renewed financial market turmoil. China fended off renewed pressure to let its currency rise as Premier Wen Jiabao said the demands being made of Beijing to push up the yuan's exchange rate were not fair. In the UK, GfK consumer confidence dropped for the first time in more than a year, indicating that consumer confidence remains fragile. On Friday, crude oil ($76.23) gained back most of its early losses ending the session slightly lower. Today, the calendar contains the first estimate of euro zone CPI, the UK mortgage approvals and Chicago PMI EUR/USD On Friday, the Dubai story was still the key factor for trading on almost all markets. In Asia and at the start of trading in European, the sell-off in riskier assets continued, triggering a further unwinding of carry trades, too. The yen and the dollar continued to gain ground. EUR/USD spiked to the 1.4830 area. However, during the morning session in Europe, some calm returned to the markets and EUR/USD soon regained the 1.49 mark. European stocks recouped the earlier losses and the panic gradually faded. The EC commission confidence indicators confirmed the gradual improvement in sentiment, but were no big issue for trading. Investors in the first place were watching out how US markets would react to the Dubai story even as US trading still developed in a thin market. US Stocks opened sharply lower. However, the losses were much more contained compared to what was on the screens in Europe on Thursday and in Asia. So, the safe haven flows dried up and EUR/USD managed to realize a new upleg early in US trading. The pair closed the session at 1.4988, not that much different from the 1.5019 close in Friday evening Today, the US calendar contains the Chicago PMI and two smaller regional business indicators. In Europe the Flash CPI for the month of November will be published. However, repositionings in the wake of the Dubai headlines will continue to be the major factor on almost all markets. This morning, markets apparently took some additional comfort from the Central Bank of the UAE providing some emergency support to Dubai Banks. It is a bit too early to say that this story has already run its course, but we have the impression that it is moving to the backstage. EUR/USD quite easily regained the 1.50 mark. This morning, there were also quite some headlines on the screens on the meeting between Europe and China. With respect to yuan, China didn't give any hint that it is preparing even a moderate change to its currency policy. Stability (against the dollar) is still the name of the game. However, considering the 'results' after the meeting between China and the US earlier this month, this Chinese standstill should come as a surprise. Also interesting, European Commissioner Almunia over the weekend expressed a strong commitment that Greece will never default on its sovereign debt because the country has the backing of the European Union. It's not really a big issue for the currency market yet, but if pressure on Greek spreads would ease, it might also be a slightly euro supportive factor. To conclude, we have the impression that the Dubai storm is calming. This will reduce safe haven flows and the euro might be short-term beneficiary of this process, too Global context. Already for quite some time, the swings in risk appetite/risk aversion are the main driver for price action on the currency markets. Improving investor sentiment towards risk is still considered a good reason to sell the US dollar. On top of that, 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 stay dollar skeptical as long as we don't get a clear signal that the Fed is coming closer to reversing its very stimulating monetary policy. Recently, several key Fed members, including Bernanke, obviously refrained from giving such a signal. The opposite was the case. The swings in risk appetite/risk aversion might accelerate/slow the decline of the dollar against the euro. However, the theme of risk appetite/aversion at some point will stop playing its role as a guide for currency trading in general and EUR/USD in particular. Recently, we indicated that this point was coming closer and that the decline of the dollar could become a factor of global uncertainty. Last week's 'Dubai-driven' price action didn't confirm this thesis but we continue to monitor the situation. Nevertheless, this morning swift EUR/USD rebound suggests that it won't be easy for the dollar to make any sustained gains against the euro on this issue. A swift return (or even break beyond) the 1.5144 year high might bring the theme of global dollar weakness again to the forefront. Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 and above the 1.4719 (Dec high) improved the picture, but the move continued to develop in a gradual way. Nevertheless, the corrections, if any, were very limited, too. The pair tested several times the longstanding uptrend line since March, but a break didn't occur. So, the ST picture remains euro constructive, even as the momentum of the uptrend was waning. Tuesday's break above the previous was a new USD warning signal but after last week's correction, the pair is again within the 1.4626/1.5064 trading range. The long-standing uptrend was challenged on Friday, but once again, not a clear break occurred. So, the positive bias in this pair remains in place EUR/USD: Dubai-triggered correction short-lived? Support comes in at 1.5020 (Break-up hourly), at 1.4965 (Uptrend line/Reaction low/MTMA), at 1.4938/20 (Boll Bottom/ Midline/LTMA), at 1.4828 (Reaction low) and at 1.4761 (Boll Bottom). Resistance stands at 1.5084 (reaction high hourly/), at 1.5099 (Bollinger top), at 1.5145/65 (year high/76% retracement). The pair is slightly overbought USD/JPY On Friday, the Dubai jitters were also the key driver for USD/JPY trading. A spike in risk aversion early in the session pushed USD/JPY to test the 85.00 mark. However, Japanese authorities raising the option of contacting the G7 partners to address a disorderly move might have helped to ease the pressure. Later in the session, pressure on global markets eased too, USD/JPY came close to the 87.00 mark early in US trading. However, this previous support area apparently has become a first important resistance now. The USD/JPY rebound stalled and the pair closed the session at 86.53, compared to 86.59 on Tuesday evening. This morning, Japanese/Asian stocks are showing quite a forceful rebound. However, this is no big support for USD/JPY. The pair continues to drift further south. Fin Min Fuji denied press headlines mentioning him saying that intervention in the currency market was impossible. Nevertheless, markets apparently came to the conclusion that chances for (coordinated) interventions are not that big at the current juncture. 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 even reversed. The dollar (and not the yen) was said to have become the preferred funding currency for carry trades. So, price action in USD/JPY to some extent joined the global dollar trend (decline). The long-term trend obviously remains USD/JPY negative. We have a long-standing sellon upticks approach, but we took profit ahead as the pair reached the range bottom in the 88/87 area. Last week's drop, below this key support level made the picture even more negative for USD/JPY. The risks are clearly to the downside. However, from a tactical point of view we don't feel the need to challenge the possibility of USD/JPY interventions from the BOJ. We still look to reinstall USD/JPY shorts in case of a more pronounced uptick (which might occur in case of interventions USD/JPY: Sell-off blocked in the 0.85 area, but downward pressure persists Support is seen at 86.00 (Reaction low), 84.82 (Reaction low), at 84.51 (Monthly Bollinger bottom), at 83.71 (Irreg. B), at 81.61 (2e Irreg.b) and at 80 (psycho). Resistance comes in at 87.02/17 (STMA/Reaction high), at 88.23/43 (Breakdown hourly/MTMA). The pair is in oversold conditions. EURGBP On Friday, EUR/GBP developed in a rather thin sideways trading range. Ongoing market nervousness on Dubai at the start of trading in Europe caused EUR/GBP to retest Thursday's highs. The involvement of the UK Financial sector in the Middle East continued to weight on the UK currency. However, as the Dubai induced pressure eased later in the session, sterling regained some ground, too. EUR/GBP closed the session 0.9083, little changed from Thursday's 0.9090 close. This morning, the UK GfK consumer confidence came out materially weaker than expected. The Hometrack Housing survey showed a further gradual improvement. EUR/GBP is slightly higher this morning. Later today, the money supply, lending data and mortgage approvals will be published. Global context: Since early August, sterling sentiment deteriorated again as the BoE raised the asset purchase program to £175B. On top of that, BoE's King kept a dovish tone, indicating 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 and October meetings, the BoE took no additional policy steps. However, the debate on additional QE steps was still ongoing. Nevertheless, a sterling short-squeeze kicked in since mid October, even as speculation on additional QE continued. The November BoE decision to raise the amount of asset purchases (surprisingly) didn't bring any harm for sterling and reinforced the feeling that the sterling correction might have further to go. From a fundamental long term point of view, we don't see any reason to turn sterling positive in a context where the BoE is lagging the ECB in scaling down (a much more aggressive) monetary stimulation. However, in a shortterm perspective, we couldn't ignore the sterling constructive mood/technical picture. This pair dropping below the 0.8900 area was an additional warning signal. However, sentiment changed again after the publication of the Minutes of the November policy meeting as the BoE discussed the possibility of cutting the discount EUR/GBP regained the 0.8900 area and is holding well above the MTMA (today at 0.8992). So, the downside alert in EUR/GBP has been called off. A first test of the 0.9060/78 resistance area was rejected, but the pair finally cleared this barrier at the end of last week. If sustained, this would make the ST picture again positive for EUR/GBP. We maintain a buy-on-dips approach for EUR/GBP. However, we hope to get an opportunity to step in, in case of a correction lower in the 0.8900/0.9240 trading range. A cooling down in the Dubai tensions might provide such an opportunity. To be honest, this morning's price action questions whether such an opportunity will occur. EUR/GBP: holding above the 0.9065/78 area Support comes in at 0.9060 (reaction low) at 0.9012 (break up hourly) and at 0.8992/78(MTMA/reaction low). Resistance is at 0.9134 (reacting high) and at 0.9191 (62% retracement), at 0.92.40 (Reaction high). The pair is in overbought conditions News EMU: EC confidence extends rebound in November In November, the European Commission confidence indicators showed a further improvement in economic confidence. The headline index rose from a revised 86.1 to 88.8, while the consensus was looking for a figure of 88.0. The details show that the improvement was supported by all sub indices, with the biggest increases in retail (-11 from -15), construction (-26 from -29), and services (-4 from -7) confidence, but also business (-19 from -21) and consumer (-17 from -18) confidence improved. The outcome confirms the recent improvement in the PMI's and IFO and indicates that sentiment is improving further in the euro area. After German, also Spanish CPI inflation returned to positive territory in November. On a yearly basis, Spanish CPI rose from -0.6% Y/Y to 0.4% Y/Y, while an outcome of 0.1% Y/Y was expected. In Belgium, CPI inflation stayed negative for the seventh consecutive month. In November, inflation rose from -0.97% Y/Y to -0.12% Y/Y. Today, also euro zone inflation is forecasted to return to positive territory. 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.