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Thursday, 24 November 2011 11:33

Euro Ever More Affected By Spreading Of The EMU Debt Crisis

Sunrise Market Commentary

  • German bonds suffer, US bonds book modest gains
    Yesterday, global core bonds parted ways. The main reason for the divergence were the US (strong) and German (ugly) bond auctions. The launch of the new 10-year Bund was a real catastrophe as the €6B issue drew less than €4B bids. A warning signal that investors start doubting the safe haven status of German bonds?
  • Euro ever more affected by spreading of the EMU debt crisis
    Recently, the euro held up fairly well even as the spreading of the EMU debt crisis accelerated. However, this pattern is clearly changing. Yesterday’s failed German bond auction was another illustration that the EMU system as a whole could be affected. EUR/USD extended its established downtrend.

The Sunrise Headlines

  • US Equities extended their losing streak on Wednesday ahead of the Thanksgiving market holiday. The S&P dropped more than 2% led by financials and energy shares. This morning, losses remain rather limited in Asia, except for Japanese shares which dropped to their lowest level since April 2009 after being closed yesterday.
  • In a special report on France's public finances, rating agency Fitch warned the rise in government debt meant France's ability to absorb now shocks without undermining its triple-A rating had been largely exhausted.
  • The European Commission proposed yesterday significantly tighter controls over euro zone members' budgets, alongside options for a common euro zone bond market. The proposals would have struggling governments submit to frequent reviews of the economic policies and accounts.
  • Moody's Investors Service said yesterday the failure of the congressional committee to reach an agreement on deficit reduction did not affect the Aaa rating, but warned that its top rating for the US could be in jeopardy if lawmakers backtrack on $1.2 trillion in deficit cuts planned over 10 years.
  • Bank of England policymakers see no case at the moment for increasing monetary stimulus, the minutes of the latest MPC meeting showed as all nine members voted for maintaining their target level of asset purchases at £275 billion pounds.
  • Today, US markets are closed in observance of Thanksgiving. In the euro zone, the German IFO indicator is scheduled for release and in the UK the second estimate of Q3 GDP will be published

Currencies: Euro Ever More Affected By Spreading Of The EMU Debt Crisis


On Wednesday, the news flow remained mostly negative. In particular, the spreading of intra-EMU contagion continued at an almost unprecedented pace. This kept the euro under pressure. That said, the pace of decline still developed in quite an orderly way.

The euro was already under pressure in Asia yesterday morning. The decline of the China HSBC manufacturing PMI reinforced doubts on the pace of global growth. There was also market chatter on the potential consequence of the implementation of the Dexia deal on the debt situation of France and Belgium. These factors pushed EUR/USD to the mid 1.34 area. In Europe, the advance reading of the PMI's were not worse, even slightly better than expected, but the data still suggest that the European economy is heading for extremely stormy weather in the near future. The key event on European markets yesterday was a 6 bln 10-year German bund auction. The sale failed to attract enough investor interest. This raised questions on how long Germany could keep itself isolated from the spreading of the EMU debt crisis. The failed bund auction triggered a next selling wave of the euro. EUR/USD dropped below the 1.34 big figure. Early in the afternoon a report from rating agency Fitch warned that the escalating eurozone crisis could put France's sovereign debt rating at risk. This was also no help of the single currency. The US eco data where mixed (durables and personal income slightly better than expected/personal spending, claims and Michigan confidence in line to slightly weaker). Overall, the data weren't that bad, but they were not enough to change the negative investor sentiment. US equities nosedived and EUR/USD extended its decline. Contrary to the German auction, the US 7-year bond auction received strong investor interest. The pair reached an intraday low in at 1.3320 area and closed the session at 1.3342, compared to 1.3505 on Tuesday evening.

Today, most US traders and investors will be absent in observance of the Thanksgiving holiday. So, global trading will develop in thin market conditions. In Europe, markets will keep an eye on the German IFO business climate indicator. The indicator is expected to show a further decline both for the current assessment as for the expectations sub-index. After yesterday's failed bond auction in Germany, a (much weaker) than expected IFO might reinforce markets fears that the EMU debt crisis, through all kinds of channels, will also hit the German economy and the German financial system. As we put the risk for the IFO to come out weaker than expected, the odds are also for a further decline of the euro. Aside from the day-to-day story, the global picture on the EMU debt crisis also hasn't changed. The major protagonists who are supposed to solve this crisis continue to openly proliferate their highly divergent views. Yesterday's conflicting communication of Angela Merkel and of EU's Barroso on the issue of Ebonds was another painful illustration that it will be very difficult for Europe to address the debt issue in a coordinated way. As long as there is no political progress on a coordinated and forceful approach to address the spreading of this crisis, the easiest way for the euro (EUR/USD) will be south, even as the fundamental situation in the US is not really that much better. Today, we also look out for the meeting between German Chancellor Merkel, French president Sarkozy and Italian Prime Minister Monti. However, we doubt that this meeting will mark a U-turn in the European approach to address the crisis. We maintain our sell-on-upticks strategy.

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 a new escalation of the EMU debt crisis (the announcement of an EMU referendum by the Greek PM) again overthrew this improvement in the technical picture. From there, the pair lost gradually ground but finally dropped below the 1.3655/08 support area. The technical picture deteriorated and the pair set consecutive new short-term lows. The new (interim?) low is set at 1.3320. The 1.30 area might soon come in the picture, with the 1.3145 (4 Oct low) an important intermediate support. A sustained break above 1.3653 (neckline H&S) would be a first sign that the downside pressures are waning. We maintain a sell-on-upticks approach

EUR/USD: debt crisis is causing ever more damage for the single currency.

Support comes in 1.3339/20 (Reaction low/Week low), at 1.3255/52 (Daily Boll Bottom + daily envelope), at 1.3142/20 (04 Oct low /Daily starc bottom), at 1.3048 (Last target off from 1.3653) and at 1.2996 (Last target off 1.3968).

Resistance stands at 1.3405/13 (Daily envelope/ reaction high hourly), at 1.3443/69 (STMA/Breakdown daily), at 1.3532/40 (Reaction high/MTMA), at 1.3568 (Week high) and at 1.3646 (50 MA).

The pair is in oversold conditions.


On Wednesday, the price swings in USD/JPY were wider than what we got used to of late. USD/JPY was seen in the 77 area in Asia and early in Europe. Later in the session, USD/JPY (temporary) profited from broad-based dollar strength. The failed German bund auction pulled the trigger for this move. USD/JPY reached an intraday high at 77.58 and closed the session at 77.31, compared to 76.97 on Tuesday evening. This morning, Japanese exporters apparently still saw yesterday's 'up-tick' as an opportunity to buy yen. So, USD/JPY is again in the low 77 area at the moment of writing. Later today, trading will probably develop in thin market conditions as most US traders will be absent in observance of the Thanksgiving holiday. During most of the summer, USD/JPY was under pressure mirroring global dollar weakness while the yen continued to 'enjoy' an ongoing safe haven bid. The BOJ made clear that it stood ready to step in the market in case of further yen gains, which effectively occurred two weeks ago. Will it really be able to change the course of events in a fundamental way? We don't see a trigger to change the current framework for USD/JPY trading. In September/early October, the dollar was temporary in better shape even as US monetary policy suggests ongoing global dollar weakness. However, this broader dollar rebound was hardly visible in the USD/JPY cross rate. Any upticks soon met selling interest. We don't see much room for a sustained rebound of USD/JPY, except when it might get additional big support from the BOJ. The cat-and-mouse game between the BOJ/MOF and the market continues

USD/JPY: up-ticks remain very short-lived.

Support comes in at 76.95/93 (Reaction lows hourly/62% retracement), at 76.73/58 (week low/18 Nov low), at 76.31 (76 %retracement), at 76.17/13 (Daily Boll Bottom/weekly envelope) and at 76.00 (Break-up daily).

Resistance is seen at 77.20/41 (MTMA + Daily Boll Midline), at 77.58 (Week high + daily envelope), at 77.91(Breakdown hourly +weekly envelope daily) and at 78.65 (Daily Boll top).

The pair is in overbought territory


On Wednesday, the EUR/GBP cross rate initially settled in the lower-to-mid 0.8600 area. As was the case over the previous days, the price action on the European markets was mostly technically inspired, driven by 'small' news headlines. The euro was under pressure in Asia, but European equity markets managed to limited the damage and the decline of the euro slowed. EUR/GBP even returned to the mid 0.86 area early in the session. The tone of the BoE minutes was soft and the BoE keeps the door open for more QE once the current tranche of asset purchases will be finished in February. However, all this was no surprise for (currency) markets anymore. Later during the morning session, European markets were spooked by a very poor German bond auction. This triggered additional euro selling across the board and EUR/GBP dropped to the 0.8600 area. During the US trading hours, cable and EUR/USD moved again more or less in step. So, EUR/GBP settled near the 0.86 big figure. The pair closed the session at 0.8594, compared to 0.8639 on Tuesday evening.

Today, the details of the UK Q3 GDP will be interesting. We keep an eye at the performance of domestic spending. However, we doubt that the report will change the global outlook on the UK economy and monetary policy going forward. The same assessment can be made for the CBI distributive trades report. However, the global situation in the EMU will continue to be the key driver for trading. In this respect, we keep a close eye on the German bond market and on the CDS of Germany and France. A further rise in the risk premia on these countries might weight on the euro overall and, to a lesser extent also on EUR/GBP. Yesterday, we indicated that it would not be easy for EUR/GBP to sustain north of this week's high (0.8665). We hold on to that view and look to sell into strength for return action to the 0.8486 range bottom.

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. This changed, at least temporary, the balance between the euro and sterling. EUR/GBP dropped (temporary) below the 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. 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. 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 and this week's move suggests that indeed the downside is better protected. A drop below last week's low (0.8486) might open the way to the 0.8285 year low, but is less likely now.

EUR/GBP: (slightly) lower on overall euro weakness

Support comes in at 0.8588/87 (Reaction low hourly/break-up daily), at 0.8575/70 (Daily envelope/ MTMA), at 0.8553/48 (week low/Broken daily Channel top), at 0.8518/11 (15 Nov low/Weekly Boll bottom) and at 0.8486 (MT reaction low).

Resistance is seen at 0.8618 (Breakdown daily), at 0.8637/48 (Daily Envelope + LTMA), at 0.8659/65 (50 d MA/Week high) and at 0.8682 (Broken daily uptrend line).

The pair is unwinding overbought conditions.


US: durables report shows a mixed picture

US durable goods orders dropped for a second straight month in October, in line with expectations. While the decline in October was somewhat softer than expected, the previous month's figure was sharply downwardly revised (from -0.8% M/M to - 1.5% M/M). On a monthly basis, durable goods orders dropped by 0.7% M/M in October led by weakness in transportation (-4.8% M/M). Within transportation, nondefense aircraft dropped by 16.4% M/M, while vehicles and parts rose by 6.2% M/M. Excluding the volatile transportation orders, the durables rose by 0.7% M/M, while a stabilization was expected. The breakdown shows a mixed picture as only machinery (1.6% M/M) and primary metals (3.0% M/M) orders jumped in October, while orders for electrical equipment (-5.2% M/M), fabricated metals (-0.3% M/M) and computers and electronics (-0.1% M/M) dropped. Shipments of non-defence capital goods less aircraft fell by 1.1% M/M, the second consecutive decline, a poor start to the fourth quarter.

In the week ended the 19th of November, US initial jobless claims picked up slightly. Initial claims rose by 2 000 for an upwardly revised 391 000 to 393 000, while the consensus was looking for a slightly lower outcome (390 000). The less volatile four-week moving average extended its downward trend, falling from 397 500 to 394 250. Continuing claims, which are reported with an extra week lag, rose from an upwardly revised 3 623 000 to 3 691 000, significantly above the estimated 3 621 000. The overall picture remains however intact and indicates that the US labour market is slowly improving, but job growth remains insufficient to bring the unemployment rate significantly down.

EMU: services PMI picks up slightly in November

According to the advance estimate, euro zone manufacturing PMI extended its downward trend in November. The headline index fell from 47.1 to 46.4, marginally below the consensus estimate of 46.5 and the weakest level since July 2009. New orders contracted for the sixth consecutive month and at the fastest pace since May 2009. But domestic and export orders fell sharply. Employment in the manufacturing sector stayed unchanged from October. National details show that manufacturing activity contracted for a second straight month in Germany (47.9 from 49.1) and the pace of contraction accelerated. In France, manufacturing PMI dropped from 48.5 to 47.6, the fourth consecutive month of contraction. Euro zone services PMI, on the contrary, rebounded from 46.4 to 47.8, while a slight decline (to 46.0) was expected. In the services sector, new orders continued to drop, but the pace of decline eased compared to the previous month. While the composite PMI picked up slightly compared to the previous month, there are few reasons to become optimistic as it is unlikely that the worst is over for the euro area. In the manufacturing sector, orders are falling sharply and employment is stagnating. Markit, the company responsible for the data, added that the survey data suggest the euro zone economy is contracting at a quarterly rate of approximately 0.6% in the fourth quarter.

Euro zone industrial new orders fell in September at the sharpest pace since late 2008. On a monthly basis, industrial new orders dropped by 6.4% M/M, while a more moderate decline (by 2.7% M/M) was expected. The annual rate of growth slowed from 5.9% Y/Y to 1.6% Y/Y. The breakdown shows that weakness was broad-based and led by capital goods (-6.8% M/M) and intermediate goods (-3.2% M/M). In the third quarter, production held up reasonably well, but is now slowing sharply. The scale of deterioration is shocking and raises expectations that the euro zone will slow in the final quarter of the year.

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