Currencies: Risk Aversion Contiues To Set The Tone For Currency Trading

Daily Forex Fundamentals | Written by KBC Bank | Dec 09 09 08:26 GMT |

Sunrise Market Commentary Global bonds advance on fears for some after-shocks of the great financial crisis The German yield curve bull steepened after Fitch cut Greece's credit rating to BBB+. It raised fears about the solvency of the country. Intra-EMU government yield spreads all saw some widening, but in a measured way. Post-payrolls losses have now been completely erased, underlining the still bullish underlying bond sentiment FX: risk aversion contiues to set the tone for currency trading A series of negative headlines on Dubai and market worries on the budgetary situation in Greece caused investors to look for safe haven shelter. This triggered to ‘usual' reaction on the currency markets. The yen was the winner; the dollar a good second. The headlines on Greece reinforced the correction in EUR/USD The Sunrise Headlines On Tuesday, US Equities opened with significant losses as downgrades sparked renewed concerns over deteriorating public finances. Dow/S&P ended the session 1% lower led by energy shares. This morning, Asian stocks show limited losses. According to people familiar with the matter, US Treasury Secretary Geithner plans to tell Congress that the Obama administration will extend the $700 billion TARP that expires on December 31. Yesterday, Greece saw its credit rating downgraded by Fitch to the lowest level in the euro zone as fears mounted over its deteriorating public finances. Moody's downgraded Illinois' general obligation bond rating to A2 from A1 citing the state's financial woes stemming from the US recession. Japan's economy grew at a far slower pace in the third quarter than first estimated as capital spending fell. GDP rose an annualized 1.3%, significantly slower than the 4.8% reported last month. The Bank of Canada held its key interest rates near zero as expected, but repeated its pledge to hold overnight rates at 0.25% until the end of June 2010, even though it said economic recovery is gathering momentum. Crude oil ($73.12) dropped for a fifth consecutive session on Tuesday, ignoring a report which showed that inventories fell last week. Gold prices ($1 131/ounce) fell to its lowest level in three weeks. Today, the eco calendar contains only the UK trade balance. Also in the UK, the Chancellor reveals the pre-budget report, while in the US and Germany auctions will take place. EUR/USD On Tuesday, some kind of crisis feeling returned to global markets. Moody's cutting the ratings of six Dubai-linked companies was one factor reducing the appetite for riskier assets. In a separate call, the rating agency also indicated that the AAA credit ratings of the US and the UK may test the boundaries of the top credit rating. Last but not least, there was a lot of market talk on the fiscal situation of Greece and around noon, Fitch cut the credit rating of the country to BBB+ from A-. On top of that, the industrial production data came out much weaker than expected. All this provided a euro-negative cocktail. During the morning session EUR/USD held op rather well. Initially, the damage on the European stock markets was rather limited, too. However, the indices came under pressure around noon and the Greece downgrade reinforced the sell-off. This global correction and decline in appetite for risk dragged also EUR/USD lower. Selling pressure mounted as soon as US traders got involved. EUR/USD fell back to Monday's lows at the start of US trading and the break below this 1.4755 support area triggered additional stop-loss selling. The EUR/USD cross rate stayed under pressure further out in the session, even as there was market talk of ongoing central bank buying interest to diversify away from the dollar. EUR/USD closed the session at 1.4704, again a loss of more than one big figure compared to the 1.4827 close on Monday evening. Today, eco calendar contains again only some second tier releases, both in the US and in the euro zone. So global market tensions/developments will continue set the tone for price action on global markets and in EUR/USD. The question is whether the budgetary problems of Greece (and potential similar problems for other sovereign issuers) will become a factor of lasting importance for trading on global markets or whether it will fade as easy as the Dubai story did two weeks ago? The least one can say is that, even after Friday's payrolls, risk (and for example not the improving growth outlook in the US or expectations on monetary policy) remains the key driver for EUR/USD trading. This morning, we have the impression that the heat is cooling. This might slow the correction of EUR/USD. However, sentiment remains fragile and it shouldn't come as a surprise if investors would stay cautious going into the end of the year. If so, this would also cap the short-term rebound potential of the single currency. Global context. For quite some time, the swings in risk appetite/risk aversion are the main drivers for price action on the currency markets. Improving investor sentiment towards risk was seen a good reason to sell the US dollar to set up carry trades in higher yielding/riskier assets. 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. Already, for quite some time, we indicated that we would 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, refrained from giving such a signal. Last week's better than expected US payrolls made investors contemplating whether the tipping point in the Fed's policy approach is finally coming closer. We still expected the Fed to keep a wait-and-see approach for some time to come. Bernanke's semiannual testimony before Congress in February might be a good time for the Fed to change its assessment, in case the economic developments would allow it to do so at that time. Of course, markets can anticipate on such a development. Recently, we already indicated that the theme of risk appetite/aversion at some point might stop playing its role as a guide for currency trading in general and EUR/USD in particular. Will considerations on the relative growth performance or on monetary policy take over as new trading theme? Over the previous two days, this was not yet the case. Risk aversion and some euro negative headlines (Greece) hammered the euro, but this is no dollar positive choice yet. So, EUR/USD trading is developing in some kind of no-mans land, still looking for a new trading theme. This could trigger some erratic trading going into the end of the year. As indicated above, in this context, we keep a very close eye on the technical picture. Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 and above the 1.4719 (Dec 2008 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 until Friday a break didn't occur. Thursday's rejected test of the highs and Friday's subsequent correction obviously broke the short-term positive momentum in the pair. We amended our short-term bias from positive to neutral. For now, our working hypotheses is for the EUR/USD to settle in a sideways trading pattern between 1.4626 (Nov low) and 1.5145. A break of the range bottom would indicate that a more pronounced rebound of the dollar might be on the cards. For now, we don't not front run on such a move. Nevertheless, given the longstanding build-up of USD short positions, we wouldn't be surprised to see some further unwinding of USD shorts. So, in a day-to-day perspective, a sell on upticks approach looking for return action to the 1.4626 range bottom, remains preferred. The 1.4450/85 area (previous high/previous low) is the key level to watch out for medium term. A sustained break below this level would suggest a MT trend reversal EUR/USD: euro weakness or dollar strength Support comes in at 1.4665 (Reaction low), at 1.4641/26 (Uptrend line since June/Reaction low), at 1.4611 (38% retracement), at 1.4585 (Daily envelope), at 1.4554 (1st target ST double top off 1.4800) and at 1.4880 (Oct low) and at 1.4455 (2nd target off 1.4800). Resistance stands at 1.4743/75 (Daily envelope/Breakdown hourly), at 1.4835 (STMA), at 1.4864/67 (Reaction highs), at 1.4934/50 (Boll midline/ MTMA), at 1.5012 (Weekly envelope). The pair is in oversold territory. USD/JPY On Tuesday, risk averse investors' behaviour was again the name of the game for USD/JPY trading. Both the dollar and the yen are supposed to take up the function of safe haven in case of market tensions. However, when the storm is strong enough, the yen is still a bit more preferred over the dollar. Yesterday, there were enough negative headlines (Dubai and Greece in particular) for the yen to outperform the dollar. USD/JPY drifted gradually lower for most of the session and closed at 88.43, compared to 89.51 on Monday evening. This morning, Japanese Q3 growth was revised sharply lower from the preliminary release (0.3% Q/Q VS 1.2% Q/Q). This was not really good news for the Japanese stock markets. However, impact on yen trading was very limited and short-lived. USD/JPY briefly popped up to the 88.70 area after the release. However, global uncertainty kept the yen well bid and USD/JPY is again setting new reaction lows in the 88.10 area at the moment of writing. 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. 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 sell-on upticks approach. However, from a tactical point of view we were reluctant to challenge the possibility of USD/JPY interventions from the BOJ at sub 87 levels in USD/JPY. Friday's, US payrolls sparked a nice USD/JPY rebound. However, Monday's and Tuesday's price action suggests that this move has no strong legs. We hoped to get an opportunity to reinstall USD/JPY shorts closer to the 92.32/53 previous highs. However, this looks quite far for now. In a day-to-day perspective, a cautious sell-onupticks approach is still preferred. However, from here, the yen rebound might slow with markets contemplating the risk of BOJ action. USD/JPY: yen supported by safe haven flows Support is seen 88.17/02 (Reaction low/daily envelope), at 87.80/50 (50% retracement/Break-up daily), at 87.099 (62% Retracement), at 86.46/32 (MT break-up/ starc bottom). Resistance comes in at 88.70 (Reaction high/daily downtrend line), at 8956/76 (Reaction high + daily envelope/ breakdown hourly), at 90.41 Daily channel top of 101.45) and at 90.78(Reaction high). The pair is in neutral territory. EURGBP Over the last 24 hours, the EUR/GBP cross rate had a rollercoaster ride. Early in the session the poor UK BRC retails sales and some negative headlines from Moody's on the UK AAA rating hammered the UK currency. The industrial/manufacturing production data brought no relieve either. On top of that, the lingering doubts/negative headlines on Dubai credit risks weighed on the US banking sector and on sterling. So; EUR/GBP rebounded from the 0.9020 area at the start of trading in Europe to test offers in the 0.9095 area just before noon. However, later in the session, the euro negative headlines (Greece) came to the forefront and the EUR/GBP reversed all the earlier gains. Later in the session, a positive NIESR UK GDP estimate helped the UK currency to recoup its losses. EUR/GBP closed the session at 0.9027, little changed from the 0.9016 close on Monday evening. Today, the UK eco calendar is again interesting. The trade balance figures deserve some attention, but the market focus will be on UK Chancellor Darling announcing the Pre-budget report. The UK government will have to strike a very difficult balance between giving the economy enough oxygen and convincing markets on a credible deficit reduction plan. Looking at the price action this morning, investors are a bit skeptic as to whether this balancing act will succeed. EUR/GBP spiked higher at the open of the European markets. 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 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. The sterling constructive sentiment changed again after the publication of the Minutes of the November policy meeting as the BoE discussed the possibility of cutting the discount rate. EUR/GBP regained the 0.8900 area. So, the downside alert in EUR/GBP has been called off. The pair regained the 0.9060/78 resistance, but failed to hold above this level after Friday's correction. This makes the ST picture neutral for EUR/GBP. Range trading in the 0.8900/0.9240 trading range is the preferred scenario going into the end of the year. Within this range, we continue to slightly prefer a buy-on-dips approach in line with our long-term fundamental bias. EUR/GBP: 0.9000 offering decent support Support comes in at 0.9019 (Reaction low hourly), at 0.9013/08 (Boll Midline/Reaction low), 0.8991 (Reaction low), at 0.8979/66 (25 Nov low + weekly envelop + daily envelope/Breakup daily) and at 0.8945 (Reaction low). Resistance is at 0.9063/78 (Daily envelope + reaction high/broken weekly MTMA), at 0.9017 (Reaction high), at 0.9145/54 (Weekly envelope/ 30 Nov high + Boll top). The pair is in neutral conditions. News EMU: German IP shows unexpected decline German industrial production showed an unexpected decline in October. On a monthly basis, industrial production fell by 1.8% M/M, while the consensus was looking for an increase by 1.0% M/M. However, the previous figure was upwardly revised from 2.7% M/M to 3.1% M/M. The details show that the decline was broadly based as manufacturing & mining (-1.6% M/M), construction (-2.4% M/M) and energy (- 3.4% M/M) all dropped. The decline in manufacturing and mining was led by a 3.5% M/M fall in capital goods, but also consumer goods (-1.9% M/M) fell, while intermediate goods rose by 0.6% M/M. The first decline in three months might be due to the end of the car-scrapping scheme, which dampened demand for cars, but also the stronger euro might have reduced exports. Other: UK industrial production flat in October In the UK, industrial production came out flat in October, while the consensus was looking for an increase by 0.5% M/M. Also the previous figure was downwardly revised from 1.6% M/M to 1.3% M/M. Looking at the details, manufacturing came out flat, while mining & quarrying (0.6% M/M) and oil & gas (1.0% M/M) increased. Electricity, gas & water supply fell by 1.5% M/M in October. This outcome indicates that last month's rebound due to the reopening following the summer closures was only short-lived. In December, the CBI industrial trends survey showed increase in total orders (-42 from -45). The breakdown showed a worsening in export orders (-41 from -37), finished stocks (15 from 20) and expected volume of output (-7 from 4), while average prices rose marginally (-6 from -7). Although the headline index is now at the highest level in one year, the order book remains at very weak levels 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.