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Friday, 16 September 2011 08:39

Euro Profits From Return Of Risk Appetite Ahead Of Eurogroup Meeting

Sunrise Market Commentary

  • Global core bonds extend correction
    A surprise announcement that the ECB will provide 3-month dollar liquidity affected risk sentiment positively. The early day US activity data, the NY Fed survey and the initial claims, were very weak and should have been bond friendly, but they couldn’t muster a bid in the market.
  • Euro profits from return of risk appetite ahead of Eurogroup meeting
    The surprise move of central banks, coupled with upped expectations that European policymakers may take important decisions in the weekend pushed EUR/USD above the key 1.3837 resistance. The outcome of the meetings may be decisive whether the euro can sustain above the key resistance.

The Sunrise Headlines

  • US Equities rose for a fourth consecutive session on Thursday spurred by joint central bank action to guarantee dollar liquidity. The S&P ended the session 1.72% higher led by financials. This morning, also Asian shares post decent gains.
  • The word's leading central banks joined forces to offer Europe's beleaguered banks easy access to dollars. The ECB announced it would coordinate with the Fed, BoE, BoJ and SNB top ensure unlimited dollar funding through the end of the year.
  • US Treasury Secretary Geithner will discuss with European finance ministers the possibility of leveraging the euro zone's bailout fund to make it more effective in fighting the debt crisis.
  • Rating agency Moody's announces overnight it places UBS Aa3 ratings on review for possible downgrade after the Swiss bank said it had lost around €2 billion due to rogue dealing by a London-based trader.
  • Japan's government is considering raising income and corporate taxes and selling stakes in Japan Tobacco and Tokyo Metro to finance reconstruction from the devastating March earthquake and tsunami, Finance Minister Jun Azumi said this morning.
  • Gold prices ($1770/ounce) dropped to three-week lows as riskier assets rallied after joint action by central banks to offer dollar liquidity to commercial banks. Oil prices ($112.82/barrel) on the contrary, jumped sharply higher.
  • Today, the eco calendar is somewhat lighter with only the euro zone trade balance and University of Michigan consumer confidence in the US. More attention will go out to the informal Eurogroup meeting in Wroclaw

Currencies: Euro Profits From Return Of Risk Appetite Ahead Of Eurogroup Meeting


On Thursday, EUR/USD continued to build on the 'positive' momentum that was already visible over the previous days. The short squeeze was extended and EUR/USD went for a retest of the 1.3837 previous low, closing at 1.3877. The news flow was not extremely positive, but EUR/USD traders again saw the glass half full rather than half empty. Especially the coordinated action of central banks to provide banks with dollar liquidity boosted morale. It indeed shows that central banks won't stay aside when liquidity problems are threatening financial markets. Of course, it doesn't resolve the underlying problems in financial markets and in European government debt markets. It is a measure that buys time and should be followed by other measures. There are still unknowns about the measure itself, notably the price banks will have to pay for the liquidity. If it is too high, it won't be of great help and banks might shun the facility, just as is the case with the seven-day dollar facility that already exists. However, markets had become very risk averse in the past weeks and were looking for some positive trigger. They got already some positive news in the past days and the dollar-liquidity initiative together with US Treasury Geithner participating in the Eurogroup/Ecofin meetings incited market participants to favour more risk appetite, resulting in equity and EUR/USD gains.

EUR/USD traded in the 1.3700 area at the start of the European trading session. Asian investors were rather cautious to join the rebound of the equity markets in Europe and the US on Tuesday. However, Europe remained optimistic. Investors apparently grew more confident that Greece would get the next tranche of the first aid package and this view was supported by comments from EU's Rehn. So, EUR/USD and the European equity markets started another up-leg. The Spanish bond auction was better received than the bond sale of Italy earlier this week. This also eased the short-term tensions on the EMU debt crisis. The EC indicated that growth in the second half of 2011 might come to a standstill, but this was no surprise for markets anymore. EUR/USD met offers in the 1.3825 area around noon in Europe. From there, the focus gradually turned the US eco data. The US eco data were not really inspiring as inflation was higher than expected while the activity data disappointed (claims, Empire state). The mid-morning data were soon forgotten. However, at 15.00 CET the ECB announced that it will hold dollar liquidity operations in Q4 in co-ordination with the Fed, the BoE, SNB and the BOJ (cf. higher). This triggered a rally in riskier assets and EUR/USD broke beyond the key 1.3837 resistance (previous low). Markets and the euro clearly found relief from this 'joined' respond to at least one aspect of the crisis. The Philly Fed survey was close to expectations, but markets apparently were happy that it didn't bring another negative surprise. The euro came off intra-day highs at 1.3936, retested again the above mentioned key 1.3837 level, but stayed above, closing the session at 1.3877. Overnight, EUR/USD showed some volatility, but is still near yesterday's closing levels.

Today, the calendar of eco data is thin and unlikely to affect EUR/USD in a lasting way. A stronger Michigan consumer sentiment might support the euro, as markets are more sensitive to good than to bad eco data in recent days due to the very bearish positioning at the start of the week. More important will be the European meetings in Poland in the present of Geithner. Markets have build some momentum going into these meetings, as they expect or hope that some kind of new initiative is brewing. Mr. Geithner will apparently make some propaganda for a kind of TALF operation to unfreeze the markets of non-core European government bonds. In fact it would leverage the EFSF (which size is too small). We probably know only after market closure or in the weekend whether the Geither idea has been taken up. It looks once more a solution that doesn't fit well the German ortodox mindset, but one never knows. Will policymakers be for once ahead of the curve? It might be important for all markets. We have as of yet not enough reasons to change tactics on the euro. We were a bit wrong-footed by yesterday's sharp rebound on the ECB announcement with respect to dollar liquidity. However, we still assume that a big leap higher in EUR/USD won't be that easy from the current levels. A sustained break above 1.3968/1.4055 (necklines multiple tops) would make us reconsider our position.

Global context. After the EU summit on July 21, EUR/USD held within a remarkably tight sideways trading range. The outcome of the meeting was unable to prevent further contagion on the EMU government bond markets. However, markets still saw a balance of weakness between the euro and the dollar as the news flow from the US was also far from inspiring. The eco data indicated that the US might be at the brink of a double dip recession, US policymakers had no comprehensive plan to address the debt situation and S&P downgraded the US AAA-credit rating. All this weighed on the dollar. The Fed committing to extend an extremely accommodative policy at least until 2013 was also no help for the US currency. So, EUR/USD hovered sideways in a range roughly between 1.4050 and 1.4550 in August. Two weeks ago, the EMU debt crisis came again in the spotlights. EUR/USD started a correction off from the range top. Last week, the news flow on the euro turned further negative. At the ECB press conference, the bank indicated that it changed tactics. There is even a risk of the ECB again cutting rates in the future. This removes an important support for the euro. On Friday, EUR/USD dropped below the key 1.3837 level (12 (July low). Already for quite some time, we indicated that a break below this level might be an indication that some kind of euro panic is building. It looks that we reached that stage , even as the tension eased over the previous days. The targets of the triple top formation (neckline 1.3968) are seen at 1.3381, at 1.3240 and at 1.2996. Over the previous days EUR/USD managed to limit the damage. Sustained trading above the previous range bottom 1.3837 would be a first sign that the pressure is easing, at least temporary. However, don't leave our sell-on-upticks approach yet.

EUR/USD: tries to re-break higher. European meetings might be decisive whether the euro surprise rebound is a death cat bounce or a more lasting affaire

Support comes in at 1.3834 (today low), at 1.3801 (break up hourly), at 1.3778/68 (break up hourly/STMA/daily envelope), at 1.3703 (Reaction low hourly) and at 1.3529 (Daily Boll bottom).

Resistance stands at 1.3896 (reaction high hourly), at 1.3937/53 (yesterday high/MTMA), at 1.3976 (breakdown hourly), at 1.4001 (daily envelop) and at 1.4046 (38% retracement).

The pair is in neutral territory


On Thursday, USD/JPY initially drifted cautiously lower in the mid 76 area. However, the calm in this cross rate was also disturbed by the ECB announcement on the provision of dollar liquidity. USD/JPY spiked higher as the headline hit the screens (global risk appetite) but the move was very short-lived and the cross rate soon returned to well-know territory, closing at 76.70, marginally above the 76.62 close on Wednesday.

This morning, trading remained sideways, but with a marginally positive dollar bias. Risk appetite is more prominent present in Asian equity markets than was the case in previous days, when Asian equities only reluctantly followed the more buoyant US and European markets.

Of late, USD/JPY was under pressure mirroring global dollar weakness while the yen continued to 'enjoy' an ongoing safe haven bid. The BOJ makes clear that it stands ready to step in the market in case of further yen gains. This threat slowed the rise of the yen, but until now it is unable to really change the course of events. We don't see a trigger to change the current framework for USD/JPY trading, especially as US monetary policy suggests ongoing global dollar weakness. Over the previous two weeks, the pair tried to move away from the lows. However, any upticks soon met selling interest. So, the eyes are still on the BOJ/MOF. More erratic sideways trading in the 76/77 area might be on the cards. Last week, the downside in this cross rate looked a bit better protected. A break above the 77.70 neckline would be a first indication that some bottoming out might be in store and that the trading range could be enlarged to the upside. For now this break didn't succeed yet.

Support comes in at 76.56 (week low), at 76.42 (31 August low), at 76.31/28 (Daily Boll bottom +Daily envelope) and at 75.94/69 (Historic low/Daily Starc bottom).

Resistance is seen at 76.96 (Daily Boll Midline), at 77.39 (Reaction high hourly), at 77.59/61 (week high/Daily Boll top), at 77.86 (Recovery high), at 78.30 (Breakdown daily/Daily downtrend line since 85.53)

The pair is in neutral territory.


On Thursday, EUR/GBP remained well bid as the pair held above the 0.8700 handle for most of the day. However, this time the gains in EUR/GBP were moderate compared to the further progress of EUR/USD. The UK retail sales were slight better than expected. Sterling temporary regained a few ticks after the publication of the report. However, basically the figure was still supportive for more QE. So, sterling was unable to make any big progress against the euro. Later in the session the ECB announcement on USD liquidity pushed EUR/GBP to the high 0.87 area. The pair temporarily returned part of the post-ECB decision gains, but rebounded again later on closing the session 0.8782, up from 0.8723 on Wednesday.

Today, eco calendar in the UK is empty. So, global sentiment on risk and the euro side of the story will set the tone for EUR/GBP trading. Will the Eurogroup meeting be able to bring any 'hard' measures to address the EMU debt crisis? If not, the rebound in EUR/GBP might peter out.

Global picture. The 21 July agreement was no big support for the single currency as contagion also hit the Italian bond market. EUR/GBP reached a correction low at 0.8643 early August. However, the key 0.8611 level stayed out of reach. The ECB buying Italian and Spanish bonds eased the tensions on the intra-EMU bond markets and the euro entered calmer waters. Regarding the UK side of the story, there is a decent chance that the BoE will enlarge its program of asset purchases in case UK economic growth remains weak. The risk of more QE in the UK capped any gains of the UK currency. We had a LT EUR/GBP bullish view as we expected the BoE to keep its policy loose for a prolonged period of time while the ECB was trying to bring its policy rate to a more 'normal' level. However, the ECB normalization process is obviously put on hold sine die and even a rate cut might again come on the agenda. This changed the balance between the BoE and the ECB. The flaring up of the EMU crisis pushed EUR/GBP (temporary) below the key 0.8611 range bottom. This obliged us to change our strategy in this cross rate. At the end of last week, euro panic clearly outweighed uncertainty on more QE. However, the price action this week shows that the downside risk in this cross rate is materially lower compared to the potential losses in EUR/USD in case the EMU debt crisis would flair up/derail.

EUR/GBP: returning in the previous range

Support comes in at 0.8762 (today low/Bollinger mid-line), at 0.8745/34 (Daily envelope/ break-up hourly), at 0.8711 (STMA) and at 0.8613 (Daily Boll Bottom) and at 0.8531 (week low).

Resistance is seen at 0.8790 (Reaction high), at 0.8807 (50% retracement), at 0.8842/49 (8 Sept high/daily envelop) and at 0.8886 (Aug high, neckline multiple double bottom).

The pair is in neutral territory.


US: headline and core CPI extend uptrend

In September, the US Empire State manufacturing index failed to rebound. The headline index deteriorated even further, falling from -7.72 to -8.82, while the consensus was looking for an increase to -4.00. And the details confirm the bleak picture. Shipments (-12.88 from 3.01), number of employees (-5.43 from 3.26) and inventories (-11.96 from -7.61) dropped sharply while new orders (-8 from -7.82), delivery time (-1.09 from 0.00) and average workweek (unchanged at -2.17) stayed broadly unchanged. Only unfilled orders improved somewhat, from -15.22 to -7.61 and both prices paid (32.61 from 28.26) and prices received (8.70 from 2.17) picked up in September. Somewhat more encouraging was the Philadelphia Fed index, which rebounded from -30.7 to -17.5 after an awful August month. The outcome was marginally below expectations. Looking at the breakdown, new orders (-11.3 from - 26.8), unfilled orders (-10.4 from -20.9-), delivery time (-7.0 from -18.1), inventories (10.2 from -9.8) and number of employees (5.8 from -5.2) improved significantly. Shipments, on the contrary, deteriorated from -13.9 to -22.8 and average workweek broadly stabilized. Also the forward looking index rebounded sharply from 1.4 to 21.4. The rebound in the Philadelphia Fed index indicates that last month's decline was exaggerated due to the rating downgrade and tensions on financial markets. Both the NY and Philly Fed indices are still at depressed levels though, indicating that the manufacturing sector is contracting.

In August, US CPI inflation surprised on the upside of expectations, rising from 3.6% Y/Y to 3.8% Y/Y, while an unchanged figure was expected. CPI inflation is at the highest level since the summer of 2008. On a monthly basis, inflation rose by 0.4% M/M led by higher prices for energy (1.2% M/M), apparel (1.1% M/M), transportation (0.7% M/M), food & beverages (0.5% M/M) and housing (0.2% M/M). Only prices of personal computers dropped in August, falling by 2.7% M/M. Also core CPI, which excludes food and energy, surprised on the upside of expectations rising from 1.8% Y/Y to 2.0% Y/Y, while a more moderate increase was expected. The continued steep uptrend in both headline and core CPI is surprising especially as activity is cooling down and might pose a dilemma for the Fed as inflation is ever moving higher, while the labour market conditions are very weak.

In the week ended the 10th of September, US initial jobless claims continued to surprise on the upside of expectations. Initial claims rose from an upwardly revised 417 000 to 428 000, while the consensus was looking for a decline to 411 000. The less volatile four-week moving average jumped higher too, from 415 500 to 419 500. The week under review included the Labour Day holiday which might have distorted figures and also the hurricane Irene might have had an impact on the data. Continuing claims, which are reported with an extra week lag, surprised on the upside too. In the week ended September the 3rd, continuing claims rose by 12 000 to 3 726 000.

EMU: euro zone inflation confirmed at 2.5% Y/Y

The final figure of euro zone CPI inflation for August confirmed the first estimate of 2.5% Y/Y. On a monthly basis, CPI inflation rose by 0.2% M/M in August, while the annual rate stayed unchanged at 2.5% Y/Y. The details show that prices of clothing (1.8% M/M), health (0.5% M/M), recreation & culture (0.3% M/M), household equipment (0.3% M/M) and alcohol & tobacco (0.3% M/M) rose significantly in August, while food (-0.2% M/M), education (-0.2% M/M) and energy (-0.2% M/M) were cheaper in the same month. Core CPI, which excludes food and energy, rose by 0.3% M/M, while the annual rate stayed unchanged at 1.2% Y/Y after falling sharply in July. National data were mixed as inflation slowed sharply in Greece (1.4% Y/Y from 2.1% Y/Y), Portugal (2.8% Y/Y from 3.0% Y/Y) and Spain (2.7% Y/Y from 3.0% Y/Y), while CPI rose significantly in Italy (2.3% Y/Y from 2.1% Y/Y) and France (2.4% Y/Y from 2.1% Y/Y). Euro zone inflation peaked in April and has slowed somewhat in the previous months. During the remainder of the year, inflation is forecast to ease further and will probably hit the 2% target late this year or early 2012

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