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Friday, 18 November 2011 09:40

EUR/USD Takes A Breather

Sunrise Market Commentary

  • More of the same
    In another volatile trading session, global core bonds moved back and forth on all kinds of small messages. EMU yield spreads were back again under pressure until the ECB stepped up its interventions. This time, Spain was the main victim after a weak 10-year bond issue for which it had to pay an astonishing 7%.
  • EUR/USD takes a breather
    EUR/USD took a breather after a three-day losing streak that brought the euro to a five-week low. There were a lot of headlines items that pushed the pair intra-day back and forth, but in the end nothing changed. Oversold conditions may have balanced a still negative, risk averse sentiment that is usually euro-negative.

The Sunrise Headlines

  • US Equities dropped for a second straight day on Thursday led by losses in materials. This morning, also Asian shares trade in negative territory.
  • Italy's new government has announced far-reaching reforms in order to dig the country out of crisis. Monti added that his government's agenda would be based on three pillars: fiscal rigor, economic growth and social fairness. The new prime minister comfortably won a vote of confidence in the Senate and faces today another confidence vote in the Chamber of Deputies.
  • The Bank of England may need to extend its money printing operations next year unless the economic outlook improves, BoE policy maker Martin Weale said, adding that there will be a very strong case to extend QE if things evolve as the forecasts suggest.
  • Under mounting pressure from the markets, Hungary said yesterday it would start talks with the International Monetary Fund on a new precautionary deal, marking a major U-turn by the government, but the IMF said it had not received any requests.
  • Standard & Poor's plans to update its credit ratings for the world's 30 biggest banks within three weeks and said it may well mete out a few downgrades in the process.
  • Ratings agency Standard & Poor's upgraded Brazil's sovereign debt rating by one notch to BBB, brining it in line with Fitch and Moody's which had already raised Brazil's rating in recognition of the country's steady fiscal performance.
  • Brent crude oil ($108.28) prices dropped sharply on Thursday as demand concerns are mounting.
  • Today, the eco calendar is rather thin with only the US leading indicators, Belgian consumer confidence and the Italian industrial orders

Currencies: EUR/USD Takes A Breather


On Thursday, EUR/USD took a breather following a three-day losing streak that brought the euro to a five week low. Indeed, it was a sideways trading session in which the euro traded largely with a positive bias, but couldn't hold on to (modest) gains and closed at 1.3458, virtually unchanged from Wednesday's 1.3463 close. Various factors influenced trading, but they couldn't give the pair a firm direction.

Intra-day, the euro positive bias in Asian trading stopped abruptly at the European open, as attention went to the upcoming Spanish bond auction. The yield spreads widened considerably and equities traded with a negative bias, even if losses remained contained. So EUR/USD fell to an intra-day low at 1.3437, about 70 ticks from the level at the European open. Early in the afternoon, the tide turned after a few EUR positive developments. First, the ECB started to intervene in support of Italian and Spanish bonds and a German official, Daube, head of the debt Agency, said that Europe needs a single, powerful institution to solve its sovereign debt crisis, one that preferably already exists. He added: 'It might be the ECB, it might EFSF, it might be the ESM or something new.” This suggestion by a German official that the ECB may play a role was immediately picked up, even as he also said that it was theoretically not excluded that some countries may have technically to leave the euro, if the ECB would refuse their collateral. Also the programme of the new Italian government might have inspired some return of confidence. The US eco data were robust, and while data get currently less of attention, at the margin and via equities they may have added to the rise in EUR/USD that topped out at 1.3540 once US cash equity trading started. EUR/USD in lockstep with equities fell sharply around 16 CET. At that time, the US Philly Fed survey disappointed, but Reuters ran also an article mentioning an EU official saying that there are no plans for financial assistance for Italy by the EFSF. Later on Fed governors stressed the danger of the euro debt crisis for the US economic outlook. Once the EUR/USD pair had erased intra-days, sideways trading in a tight range imposed.

Today, the eco calendar is extremely thin and unlikely to affect markets. There are a lot of potential important speakers (see calendar), while some will look forward to the Spanish elections. However, it seems that the course has been run, with the conservatives (PP) firmly in the lead in the polls. So, it shouldn't be an item for FX markets either. Asian equities are trading weak and still weakening, but contrary to what one would expect, EUR/USD is slightly higher at 1.3488. Of course the oversold conditions in the pair are still supporting the euro. Interesting too, the steep drop in oil/commodities yesterday had a rather little impact on EUR/USD. So, we would think that the general sentiment on risk and the technicals will be in the drivers' seat. The S&P is testing key support and if it wouldn't hold, it might weigh on the euro. So, while we have no firm bias regarding today's trading, we stick to a longer-term negative bias on EUR/USD.

Looking at the technical picture, end-October, the pair regained temporary the 'old' sideways trading pattern roughly between 1.40 and 1.4550. However, the Japanese interventions and the announcement of an EMU referendum by the Greek PM again overthrew this improvement in the technical picture. Last week, the pair already dropped below the 1.3655/08 support area, but returned temporary in the 1.3650/1.3870 trading range at the end of the week. On Tuesday, the break to the downside succeeded as the pair dropped below last week's low with a new short term low set at the start of Asian trading at 1.3421. The break reactivated the red alert for the EUR/USD cross rate. The 1.30 area might soon come in the picture, with the 1.3145 (4 Oct low) and important intermediate support. A sustained break above 1.3653 (neckline H&S) would be a first sign that the downside pressures are waning

EUR/USD: no news is bad news for the single currency

Support comes in 1.3467 (break up hourly), at 1.3421/05 (today low/76% retracement), at 1.3392/77 (2th target H&S/envelope monthly), at 1.3344 (Bollinger bottom/daily envelop).

Resistance stands at 1.3509 (STMA/daily envelop), at 1.3540/57 (reaction highs hourly), at 1.3591 (Breakdown daily), at 1.3646/53 (neckline H&S/MTMA).

The pair is in oversold territory.


On Thursday, trading in the EUR/GBP cross rate remained sideways oriented, near key support levels. The moves of EUR/USD were reflected in EUR/GBP, but while the former closed unchanged, there were small but insignificant gains for sterling. The unexpectedly strong UK retail sales gave sterling a push in the back and might explain the outperformance of sterling versus the dollar. However, in a broader framework, EUR/GBP is still playing with an important support level that needs to be convincingly broken before the pair may slide to the year's low. Overnight, BoE Weale said there is a 'very strong case” for extending the BoE money-printing operations next year unless the outlook improves. However, it hadn't much impact, as markets have now well taken such a possibility into stride and as the situation in the euro area overshadows the BoE policy.

Today, the UK calendar is empty and the EMU eco calendar is uneventful. We think that once more news headlines on the euro debt crisis will set the tone for trading. A long list of speakers will secure that headlines will regularly affect trading. Going into the weekend, we suspect though that FX traders won't like to be long euro.

Global picture. In August/September the EMU debt crisis came again to the forefront. In addition, at the September meeting, the ECB put the normalization process of its policy rate on hold and even a rate cut is again possible. This changed, at least temporary, the balance between the euro and sterling. EUR/GBP dropped (temporary) below the key 0.8611 range bottom. Euro skepticism, at least temporary, outweighed uncertainty on more UK QE. Still, the downside pressure in EUR/GBP remained much more contained compared to the potential losses in EUR/USD in case the EMU debt crisis would worsen. In this context, we favoured a scenario of EUR/GBP holding the sideways trading pattern between 0.8531 and 0.8800. The bottom was under heavy pressure early October but the test was rejected. The October BoE decision to raise the amount of asset purchases pushed EUR/GBP again higher in the established trading range. A broader rebound of the euro in the run-up to the EU summit triggered further gains in EUR/GBP too. The pair tested the key 0.8795 neckline late October, but the test was rejected. The announcement of a Greek referendum also triggered a major setback in this cross rate. At the end of last week, the pair dropped below the key 0.8531 range bottom. So, we were stopped out on our longstanding range trading strategy. Over time, we expect the downside in this cross rate to be much less compared to what might be the case for EUR/USD. However, in the current environment there is no reason to row against the tide. A drop below last week's low (0.8486) might open the way to the 0.8285 year low.

EUR/GBP: euro weakness prevails, but recently more sideways trading as oversold conditions and nearby support do their job

Support comes in at 0.8537 (reaction low hourly), at 0.8519 (weekly low), at 0.8512/08(Bollinger weekly/breakup hourly) and at 0.8486/73 (Mar 20 low/76% retracement).

Resistance is seen at 0.8568 (daily envelop/MTMA), at 0.8576 84 (reaction highs hourly), at 0.8603/12 (week high/Bollinger mid-line), at 0.8622/27 (breakdown hourly/Bollinger midline & 23% retracement year high to low) and at 0.8647/57(weekly envelope/Nov 4 high).

The pair is in oversold territory


US: jobless claims fall to lowest level since April

In October, US housing starts fell back less than expected. On a monthly basis, housing starts dropped by 0.3% M/M to a total level of 628 000, while the consensus was looking for a decline by 7.3% M/M. But the September figure was downwardly revised from 658 000 to 630 000. Weakness was led by multi-family starts (-8.3% M/M) after an impressive 35% M/M gain, while single family starts rebounded by 3.9% M/M after a 2.6% M/M decline in September. Building permits, on the contrary, showed a strong rebound in October. Permits jumped by 10.9% M/M to 653 000, while the consensus was looking for only a slight increase (2.4% M/M). Strength in housing permits was broadly-based, but led by multi-family ones (24.4% M/M). Single-family permits jumped by 5.1% M/M in October. Housing under construction rose slightly (0.7% M/M), while housing completed fell by 5.7% M/M. Earlier this week also the NAHB housing market index surprised on the upside of expectations, already for a second straight month. It appears that the US housing market is showing early signs of improvement, led by progress in multi-family ones as demand for rental apartments is increasing.

In the week ended November the 12th, US initial jobless claims continued to surprise on the downside of expectations, falling to the lowest level since April. Initial claims dropped by 5 000 from an upwardly revised 393 000 to 388 000, while a jump to 395 000 was expected. The less volatile four-week moving average dropped lower too, falling below 400 000, and also hitting the lowest level since April. Distortions are not excluded as the week under review included the Veteran's Day Holiday. However, the Labour Department added that there were no special factors in the figures. Continuing claims, which are reported with an extra week lag, continued their downtrend too and dropped even to the lowest level in more than three years. In the week ended the 5th of November, continuing claims fell from an upwardly revised 3 665 000 to 3 608 000. While distortions are not excluded, the claims seem on an improving trend, boding well for the November payrolls report.

After impressive gains in both September and October, the Philadelphia Fed manufacturing index dropped unexpectedly in November. The headline index fell from 8.7 to 3.6, while the consensus was looking for a marginal improvement to 9.0. The details show a more mixed picture. New orders (1.3 from 7.8), shipments (7.3 from 13.6) and unfilled orders (-1.5 from 3.4) weakened significantly, while number of employees (12.0 from 1.4), inventories (6.6 from -7.7) and average workweek (11.0 from 3.1) posted nice gains. Upward price pressures picked up again as prices paid rose from 20.0 to 22.8 and prices received increased from -2.5 to 2.6. After the remarkable rebound in September and October, the slight correction is no surprise and there is no reason to worry as the underlying details remain encouraging.

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