Dollar sell−off slows, but global picture hasn't changed
International Trading
THE TECHNIQUE OF GIVING A GOOD MASSAGE
14 years ago
Tuesday, September 28, 2010
, Posted by Usman Ali Minhas at 12:44 AM
On Monday, EUR/USD basically held a sideways trading pattern in the 1.34 big figure, digesting Friday’s steep gains. During the morning session in Europe, Moody’s downgrading some debt ratings of Anglo Irish turned the market focus again to the Irish government finances. Nevertheless, after all the damage for the euro was limited. The pair reached an intraday low at around 1.3425. Dollar weakness resurfaced once US traders came in. Decent European lending data might have lent the euro some support, too. EUR/USD even reached a minor new high just above the 1.35 mark. However, with no high profile eco data on the agenda, the 1.3510 resistance (50% retracement) perfectly played its role. EUR/USD settled again in the previous intraday sideways trading pattern. A moderate correction on the equity markets also prevented further EUR/USD gains. In an appearance before the European parliament, ECB President Trichet didn’t bring any high profile news on the Bank’s assessment of the economy or on monetary policy. The ECB President advocated the need for stricter rules on budgetary discipline, including penalties. EUR/USD closed the session at 1.3455, compared to 1.3492 on Friday evening.
Today, the calendar of eco data contains some interesting releases. German CPI and French spending are interesting, but probably no market movers. This might be different for the US CS house prices and the US consumer confidence. Disappointing US data might fuel the speculation on more QE in the near future and weigh on the US currency. Of course, one should also keep an eye on the European sovereign debt story. However, looking at yesterday’s price action the widening of the spreads in peripheral countries and especially the negative headlines on Ireland had remarkably little impact on the single currency. According the an article in the WSJ, the Fed is said to considering a smaller-scale bond buying program incase they would set up additional QE . However, at least for now this element of the QE debate didn’t give much support to the US dollar.
The Fed’s assessment on the economy and the potential consequences for monetary policy have changed the framework for trading on global markets. At first stage, the risk for more US QE (logically) is seen USD negative. In a longer term perspective, there is not only the issue/risk of more QE from the Fed. Other major economies face similar issues of deflationary risks or have their own specific problems that might undermine investor confidence at some point in the future. For example, any additional QE from the Fed at some point might force other central banks (like the BOJ, the BoE or the ECB) to take more ‘unconventional’ measures, too. In addition, slowing global growth and a weaker dollar might over time also be a negative scenario for (peripheral) European economies.
They desperately need (export-driven) growth to keep their government finances on a sustainable trajectory. So, in a long-term perspective a lot of different scenarios are still possible and markets refocusing on European sovereign risk at some point might obviously be one of them. However, in a short-term perspective, we continue to see the risk for more Fed easing as the dominant factor for currency trading. Dollar weakness is the name of the game and at least for now, any USD negative news still seems to attract additional USD selling. Recently we had a USD-negative (EUR/USD positive) bias. We maintain a buy-on-dips approach. The dollar negative trend looks quite strong. Nevertheless, we still hope for somewhat of a more pronounced correction to add to EUR/USD long exposure.
From a technical point of view, until mid September, EUR/USD was locked within a sideways trading pattern between 1.2923 (mid August high) and 1.2588 (24 August low). The break beyond this level improved the technical picture and opened the way for a retest of the early August high at 1.3334. This high profile level was easily cleared after the Fed meeting. The targets of this break are well beyond the 1.40 mark! In a day-to-day perspective, EUR/USD entered a consolidation pattern after last week’s rally. Nevertheless, the global picture remains EUR/USD positive (in fact dollar negative).
Absolutely no story to tell on USD/JPY price action on Monday. The pair was paralyzed in an extremely tight trading range in the lower half of the 84.00 big figure. Global dollar weakness is still perfectly counterbalanced by the fears for renewed BOJ interventions and ongoing market talk on the BOJ potentially engaging for further policy easing in the near future. Among other measures, the government continues to push the BOJ for raising its government bond buying. USD/JPY closed the session at 84.29 compared to 84.21 on Friday evening.
This morning, there were only some second tier eco data on the agenda in Japan. Markets are looking out for the key Tankan report scheduled for tomorrow morning. This report might be an important input for (monetary) policy going forward. Asian equities returned part of yesterday’s gains, but at least for now this is no big issue for USD/JPY trading.
Over the past two weeks, USD/JPY trading entered a new area as the BOJ on behalf of the Japanese Ministry of Finance stepped into the market to block the uptrend of the yen. In this context, the usual drivers for USD/JPY (global investor sentiment and to a lesser extend US and/or Japanese economic data) have lost most of their relevance for USD/JPY trading. Markets and the BOJ are now engaged in some kind of cat-and-mouse game. For now, it looks the BOJ has still the upper hand in this game. Of course, this balance can change over time (e.g. after the end of the quarter). In a longer term perspective, we hold on to our view that it will be difficult for the BOJ convince its trading partners on the need for a weaker yen. At best, they might get some kind of silent approval to slow a too sharp rise of its currency.
Short-term, we expect the tactical game between the Japanese authorities and the market to continue. In a day-to-day perspective, we still hold on to our view that the downside in this pair is rather well protected. Additional tactical waves of yen selling are still possible, but we expect the impact of further action to fade rather soon. Short-term players can look to join the BOJ for a next spike higher. Nevertheless, this remains a binary game and the fears for more QE after last week’s Fed statement haven’t increased the upside potential of the US currency overall. So tight stoploss protection remains warranted. One might also assume that ever more investors (e.g. Japanese exporters) will use a new spike in the wake of additional BOJ action to offload USD long exposure.
On Monday, cable slightly outperformed EUR/USD. So, EUR/GBP also returned a part of last week’s gains. The headlines on Anglo Irish triggered some stop-loss euro selling in this cross rate too and contrary to EUR/USD, this correction wasn’t reversed later in the session. A constructive IMF report on the fiscal consolidation in the UK might have been slightly sterling supportive, too. Nevertheless, with the pair still holding north of the 0.8500 mark, the global picture hadn’t changed. EUR/GBP closed the session at 0.8500, compared to 0.8525 on Friday.
Today, the UK calendar contains the final revision of the Q2 UK GDP. We consider this as outdated news. Later in the session the CBI reported sales will be published. Overt the previous months this indicator showed rather strong readings. A slightly less positive figure is expected. If so, this might be slightly negative for sterling.
EUR/GBP drifted lower from mid July to late August. Amongst others, this move was support by some encouraging eco data from the UK at that time. However, late August EUR/GBP showed some signs of bottoming out. The key 0.8066 support was never challenged. Since then a gradual rebound occurred. This move was both due to global euro strength but also mirrored investors’ disappointment on some poor UK eco data of late. In addition, the interest rate differentials (at the short end of the curve) moved slightly in favour of the euro. Earlier this month, the EUR/GBP pair tested several times the 0.8363/0.8400 resistance area. Last week, the pair did break this area in a convincing way. The Fed statement apparently made investors think that the BoE at some point might also consider more QE. Wednesday’s BoE minutes were seen as confirming this feeling on potential additional steps from the BoE and pulled the trigger for EUR/GBP to clear key 0.8532 level (July 19 high). At the end of last week, some consolidation/profit taking on the recent steep gains kicked in. However, as we expect any more disappointing UK data to keep speculation on more QE alive, we think that the upside for sterling (even against the euro) will be limited for now. So, we maintain a buy-on-dips approach.
Visiter
Web stat
